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Due to it’s decentralized nature, it’s hard to get a grasp on what the specific goals and complaints of Occupy Wall Street are. But it seems pretty clear at least one complaint of theirs is that “big banks are too big”. But if you think this is true, and you wanted to end it, then why would you occupy Wall Street of all places? What do they expect Wall Street to do about this? Voluntarily shrink? Even if they managed to convince current bank management to do this because… um… the drum circle had a persuasive beat, those managers would be kicked out by shareholders, and rightfully so. And what do they expect Washington to do about this? Break up the big banks? This is probably what they have in mind, but it’s a pipe dream.
Not that there’s anything wrong in protesting in favor of pipe dreams, but if occupying Wall Street and occupying Washington won’t actually help shrink big banks, then what will? Occupy your neighbors, friends, families, and anyone you know who uses the big banks. Tell them to take their deposits out and put them in a local credit union or small bank. Tell them to take loans from these places. Big banks are big for a reason: they have a lot of assets and make a lot of money. They need your deposits, they need to charge you fees. If Americans don’t want Big Banks to be big, then stop using them. There is a very simple way for everyone to vote with their pocketbooks and put their money where their mouths are. So instead of yelling at banks to stop taking deposits and fees, yell at the people around you to stop giving them.
From a new paper:
Do online consumer reviews affect restaurant demand? I investigate this question using a novel dataset combining reviews from the website Yelp.com and restaurant data from the Washington State Department of Revenue. Because Yelp prominently displays a restaurant’s rounded average rating, I can identify the causal impact of Yelp ratings on demand with a regression discontinuity framework that exploits Yelp‟s rounding thresholds. I present three findings about the impact of consumer reviews on the restaurant industry: (1) a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in market share as Yelp penetration has increased. This suggests that online consumer reviews substitute for more traditional forms of reputation…
This is the age of the consumer. One thought this prompts is that when better information allows choices that are more aligned with preferences, it will not show up directly in the consumer price index as an decrease in real prices, even though the standard of living attainable at a given income has gone up.
Say restaurant at restaurant A you can buy a util for $1, but at restaurant B you can buy 1.5 utils for $1. If you were unaware of restaurant B or believed the price of utility to be higher there, then becoming aware of it due to Yelp.com reviews decreases the real price of utils for you, and so is a decrease in your cost of living.
I won’t put forth any guestimates about how much this is worth, but it applies to at least food, arts and entertainment, housing, and automobiles.
I wrote recently that my mind was changed by the evidence on how much underwater homes were causing a decrease in mobility which in turn was causing higher unemployment. I believe it does not explain much of the current unemployment we are seeing. A new paper defends the connection between lower equity and lower mobility. The paper, by Ferreira, Gyourko, and Tracy is an update on an earlier paper of theirs that includes 2009 American Housing Survey data and improves some coding and econometric issues highlighted by another recent paper by Schulhofer-Wohl that was critical of their work.
One criticism that FGT makes of Schulhofer-Wohl is that some observations which they code as moves are in fact temporary moves, and not permanent moves. It is strikes me as debatable as to which type of move is more relevant for labor markets, and the effects of both are worth knowing.
Another issue is that knowing who has moved today from AHS data is easier to know once future data arrives, and so you can be conservative and code censor observations where move status is unclear, waiting for future data to clarify the issue. Or you can can generate a more inclusive measure of moving and risk including false positives. As FGT state, these coding decisions are consequential for the results:
…it still is useful to understand that the potential fragility of our results (and, possibly, those who came before us) arises from the fact that it is difficult to properly measure mobility in a number of cases.
In the end, it seems likely that underwater homes are decreasing housing mobility defined as permanent moves. I also agree with FGT that the true extent of this won’t become clear until future data arrives.
However, this falls short of providing evidence that housing equity is affecting labor markets. Looking at other information from AHS data, FGT note that:
Most moves are for quality-of-life, personal/family and financial reasons, and do not appear to be primarily job-related. This is especially the case for local moves. In contrast, longer distance moves, particularly those that cross a state border tend to be job-related. One potential implication of these data is that financial frictions to household mobility are more likely to reduce local moves such as trade-up purchases that need not have any significant spillover effects for labor markets.
This, they point is, is consistent with other studies on the issue. I agree with the reasoning here, and so I think it remains safe to conclude that the evidence suggests housing equity led mobility declines are not a significant cause of unemployment.
Doing the rounds on Mises circuit I am usually identified as a liberal or a person from the left. I don’t really much care so I take that ID.
However, I think its interesting to note that Reihan Salam lays out a conservative vision for what ails America that I agree with.
(1) . . .a series of federal (subsidies for mortgage debt) and local (zoning restrictions, rent regulations, etc.) interventions have made affordable, high-quality housing scarce in many of the countries most productive and regions regions . . .
(2) Resistance to HOT lanes, private toll roads, etc., exacerbates the accessibility problem by forcing us to rely on slow-moving public bureaucracies that face a number of political imperatives that compel them to, among other things, deploy labor inefficiently, devote resources to projects that aren’t cost-effective, etc.
(3) Allowing for more specialized educational providers and providing parents with flexible K-12 Spending Accounts (KSAs) could help drive down the cost and quality of education.
(4) By transitioning to competitive pricing in Medicare and catastrophic insurance for all but the sickest and poorest under-65s, we would in theory encourage the emergence of low-cost business models for the provision of medical care,
(5) Per the Chen and Chevalier research, we could take a number of steps to attack the supply constraints on the number of licensed medical providers,. . . More aggressively, we could further empower nurse practitioners and physician assistants to undertake work that is currently the province of physicians.
(6) Reform of the FDA could drive down the cost of developing new drug therapies, making them more accessible.
(7) And I imagine that patent reform would have a salutary impact on middle class in all kinds of unpredictable ways.
I think number (4) is more or less a waste of time but I am not really against it. Perhaps ironically, I think people focus way too much on the demand side in health care. The demand side is too dominated by signaling and emotionality to get any traction. The supply side is where all the action is.
Now I am largely in favor of redistribution, but as always I ask – what’s wrong with cash?
From the depths of the recession which began in 2007, and severely intensified in 2008:Q3, there has been an ever-growing chorus of (minority) opinion in the blogosphere regarding the nature of the recession, the causes, and the proper prescription for returning the economy to growth. The practitioners of this style of macroeconomics have since been dubbed the “quasi-monetarist” school, of which I consider myself a member. “Quasi-monetarism” has always been a somewhat unsatisfactory title for this group of thinkers, but it has stuck — so far.
Lars Christensen, however, seeks to change that in a new working paper entitled “Market Monetarism: The Second Monetarist Counter-Revolution“, in which he lays out the core tenets of the
quasi-monetarist market monetarist view. I will lay out some of the quotes from the paper here, also check out his post at Marcus Nunes’ blog.
The Birth of Market Monetarism
Market Monetarists generally describe recessions within a Monetary Disequilibrium Theory framework in line with what has been outlined by orthodox monetarists such as Leland Yeager (1956) and Clark Warburton (1966). David Laidler has also been important in shaping the views of Market Monetarists (particularly Nick Rowe) on the causes of recessions and the general monetary transmission mechanism.
Put simply, the “market monetarist” view of money says that in a monetary exchange economy every market is a n+1 market, and an excess supply of all goods constitutes an excess demand for the medium of exchange. Thus, the market monetarist view of recessions is that recessions are always and everywhere a monetary phenomenon.
Another key feature of Market Monetarists (and probably the feature from which Lars derived the name) is our determination of the stance of monetary policy, for which we look to market indicators of the trend rate of NGDP:
In a world of monetary disequilibrium, one cannot observe whether monetary conditions are tight or loose. However, one can observe the consequences of tight or loose monetary policy. If money is tight then nominal GDP tends to fall — or growth is slower. Similarly, excess demand for money will also be visible in other markets such as the stock market, the foreign exchange market, commodity markets, and the bond markets. Hence, for Market Monetarists, the dictum is Money and Markets Matter.
The use of market indicators of the stance and expectations of the future path of monetary policy (as opposed to short-term interest rates) is one of the defining features of the Market Monetarist movement, and it is very important from a practical standpoint. Many errors in reasoning in business/economic news stem from one line of reasoning: “low interest rates = easy money”.
Against Neo-Wicksellian Analysis
Mainstream economists and particularly New Keynesian economists place interest rates at the core of monetary policy. Furthermore, central banks mostly formulate monetary policy with an interest rates framework. Market Moentarists — as tradition monetarists — are highly critical of this approach to monetary policy and monetary analysis, which Nick Rowe has termed Neo-Wicksellian analysis (Rowe 2009).
Market Monetarists particularly object to the use of interest rates as the measure of monetary policy “tightness”…
…This view of course is in stark contrast to the prevailing New Keynesian orthodoxy where low interest rates are seen as loose monetary policy and have a significant impact on how monetary policy is analysed.
As Scott Sumner, and I believe Nick Rowe have pointed out, the movement of interest rates is just one of many effects of monetary policy. Though because interest rates are immediate and visible (indeed, the interest rate on reserves is an administered rate), we are often “tricked” into thinking interest rates are the dog, not the tail.
Interest Rates are NOT the Price of Money
A very common fallacy among both economists and layment is to see interest rates as the price of money. however, Market Monetarists object strongly to this perception. As Scott Sumner spells on in capitals: “INTEREST RATES ARE NOT THE PRICE OF MONEY, THEY ARE THE PRICE OF CREDIT” (Sumner 2011C). On the other hand, the price of money or rather the value of money is defined by what money can buy: goods. Hend, the price of money is the inverse of the price of all other goods — approximated by the inverse of for example consumer prices…
…Bill Woolsey: “An increase in the supply of credit isn’t the same thing as an increase in the quantity of money. While it is possible that new money is lent into existence, raising the quantity of money over a period of time while augmenting the supply of credit, it is also possible for the supply of credit to rise without an increase in the quantity of money. Purchases of new corporate bonds by households or firms, for example, add to the supply of credit without adding to the quantity of money”
While there is a relationship between the supply and demand for money and credit, they are not the same thing.
The Liquidity Trap Fallacy
My favorite, since I’ve been a vocal opponent of the concept of the “liquidity trap”:
In line iwth the reasoning on interest rates above is the Market Monetarist’s rejection of the so-called liquidity trap. Almost every day the financial media quot economists claiming that central banks are running out of ammunition because interest rates are close to zero. This is the so-called liquidity trap. Market Monetarists object strongly to perception that monetary policy is ineffective at rates close to zero. If one single issue has dominated Market Monetarist blogs over the last couple of years, it has been that monetary policy is highly efficient in terms of influencing the nominal economic variables such as nominal GDP or the price level. Market Monetarists do not believe there is a liquidity trap . This is consistent with traditional monetarist teaching (see for example Friedman 1997).
 This annotation was added by myself in an attempt to explain what is going on with the concept of the liquidity trap, which has a very slippery definition. Being fair, the original concept of the “liquidity trap” — that of Keynes — pertains to the effect of the so-called “conventional monetary policy instrument” (open market purchases of short-term government debt) on raising the “conventional monetary policy indicator” (inflation) [Update: at the zero lower bound].
However, “conventional monetary policy” is a construct, the same way that other “conventional policies” instituted by governments is a construct. The only “trap” involved is the “trap” imposed by conventional thinking.
Market Monetarism rather than Quasi-Monetarism
Throughout this paper I ahve used the term Market Monetarism. However, none of the five main Market Monetarist bloggers uses this term. Instead, they in general use the term Quasi-Monetarist to describe their views. I am critical of this term, as it does not say anything about the school other than it is a sort of monetarism. “Quasi” undoubtedly also makes it sound like a half-baked version of an economic school.
An economic school’s name naturally should represent the key views of the school. The Monetarist part is obvious as there is a very significant overlap with traditional monetarism. The difference between Market Monetarism and traditional monetarism, however, is the rejection of money supply targeting and the assumption about the stability of velocity is at the core of MArket Monetarists’ reformulation of monetarism.
Instead of monetary aggregates and stability of velocity, Market Monetarists advocate the use of markets as an indicator of monetary (dis)equilibrium. Furthermore, Market Monetarists advocate using market instruments such as NGDP futures, and in the case of William Woolsey — free banking — as a tool to stabilize the policy objective (nominal GDP).
Do read the paper, as it is an interest crash-course in the economic dialog and thinking in the “Market Monetarist” corner of the blogosphere, and includes a possible research agenda. Though I am not mentioned at all in the paper (sad face!), I do consider myself of the “Market Monetarist” school, and I think that the name works well enough. What do you guys think of the name?
P.P.S. If the quotes aren’t exact, it is because I had to type them myself. Acrobat, incidentally, is not a very friendly medium. The full paper should be posted as a blog post! I’d be willing to do it here, if Lars gives me the permission!
Jon Huntsman made the important and underappreciated argument that immigration could help lift housing markets:
“Why is it that Vancouver is the fastest growing real estate market in the world today? They allow immigrants in legally and it lifts all boats. We need to focus as much on legal immigration.”
Suzy Khimm at the Washington Post attempts to throw some cold water on Huntsman’s argument, but I think she gets it wrong. Or more accurately, economist Paul Dales, whom she quotes, gets it wrong. He argues that immigration wouldn’t be significant enough to sop up the excess demand in housing and thus wouldn’t make much of a difference:
…in the short term, the impact may be comparatively negligible. More immigrants overall could have a “marginally positive” effect on the U.S. market by buying vacant homes, but “any impact would be almost unnoticeable” on a national scale given the magnitude of the excess supply, says Paul Dales, a Toronto-based economist for Capital Economics, a research firm. Dales estimates that the overhang is at least one million, and potentially as high as three to four million homes. So even a sudden influx of immigrant homebuyers wouldn’t be enough to make a dent in the market, realistically speaking
There are a couple big missing pieces here. First off, what level of immigration is Dales talking about? If an extra 100,000 a year more isn’t enough, then we can let in an extra 3 million. From his own numbers, this would likely sop up the excess supply, so surely a sudden influx of a large enough amount would make a significant dent in the market.
Second, he’s ignoring the role of expectations. If we commit to some higher level of immigration each year over the next decade, than that changes the expectations for developers about the level of demand they will face, and should help spur development immediately.
I’m glad to see this issue getting discussed, and really glad to see a high profile Republican proposing it, but so far I’ve yet to see an economic argument against it that can’t be solved by increasing the proposed number of immigrants. The argument that such a policy is politically unfeasible is surely in part a function of the fact that journalists and economists aren’t constantly reminding people that, political feasibility aside, more immigration represents one of the best available policies to attack this recession.
Note this is a sector where there is a growing realization that quite a few of the workers should, for non-cyclical reasons, be fired anyway.
This is a reason why it would have been possible to fire a significant number and do so consistent with a desirable structural adjustment, thus making the decline not a bad thing per se. Districts could have tried to identify and fire the least productive teachers consistent with Hanushek’s recommendation that we do so. However, due to LIFO and other restrictive policies I would venture that is by and large not what is happening, and the teachers laid off are simply the most recent hires, or those in areas where you don’t necessarily want layoffs back but schools have an ability to do so, such as music and art. I don’t have any data on this, but it is what I’ve observed, and I wouldn’t guess this is a controversial point.
Because of this I don’t see any reason why Tyler’s point should be given much of any weight in considering whether we should hire more teachers or not. I’m open to persuasion if someone has actual data on this indicating I am incorrect.
So I started a piece by Gary Becker entitled: The Great Recession and Government Failure. I assumed that it was going to be about how difficult it is to convert blackboard economic policy into real world economic policy and how given that it might be better to take your lumps with the market.
I was thinking it would makes some good points which I could use to talk about “Nihilism All the Way Down” which is the problem that if we accept too many “failures” we end up concluding that the world can only be whatever it is right now.
For example, the market suffers from market failure. Efforts to correct that with the government suffer from government failure. However, efforts to constrain the government could suffer from “liberalization failure”, a term I use to mean the collapse in support for free markets that comes when bad stuff happens. I am sure whatever we do to correct for liberalization failure will suffer from its own failure and away we go down the Nihilistic Escalator until we conclude that its just failure all the way down.
Now, point of fact, that might well be true. But, it certainly no fun and there is no real point to spending a lot of time with. Perhaps that would be Nihilism Failure or even Failure Failure.
So, this would have been an interesting jumping off point. Instead though, I get a diatribe against the current government complete with tropes like
In the U.S., these government actions include an almost $1 trillion in federal spending that was supposed to stimulate the economy. Leading government economists, backed up by essentially no evidence, argued that this spending would stimulate the economy by enough to reduce unemployment rates to under 8%.
Such predictions have been so far off the mark as to be embarrassing. Although definitive studies are not yet available about the stimulus package’s overall effects on the American economy, most everyone agrees that it was badly designed and executed. What the stimulus did produce is a sizable expansion of the federal deficit and debt.
The misdiagnosis of widespread market failure led congressional leaders, after the 2008 election, to propose radical changes in financial institutions and, more generally, much wider regulation and government control of companies and consumer behavior. They proposed higher taxes on upper-income families and businesses, and extensive controls over executive pay, as they bashed “billionaire” businessmen with private planes and expensive lifestyles.
Aside from a somewhat sloppy treatment of the facts this piece is a little more than an exclamation. A simple, “the administration is a bunch of buttheads” would have be told us about as much.
Yet, obviously Gary Becker is capable of much more. Is it simply that the Journal won’t print it?
Here are a two, at least, that turned out to be pretty correct and not widely recognized in 2005:
2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.
3. I would think that we have piled on far too much debt, in both the private and public sectors.
The rest can be found here.
I have some very quick thoughts in reply to Erik Kain’s post at Forbes comparing unions and corporations. His point, in brief, is:
Corporations are legal entities, sanctioned by the state. Why should we be any less sanguine about unions than about corporations? Corporations pool capital and resources, unions pool labor. What’s the difference?
One important difference is that corporations are subject to anti-trust regulation. However, I think libertarians who are otherwise critical of anti-trust activity should be wary of invoking this too strongly. If the market is the best mechanism for ensuring firms do not behave anti-competitively, then why won’t that work for unions?
Another important difference is that, as Coase argued, there are costs to using a price mechanism to coordinate economic activity, and corporations exist as an alternative institution for when such transaction costs are high. One can conceivably frame the voice function of unions in this way as well, however I think that’s better characterized as public goods problem where the group collectively benefits and individuals have insufficient incentives to express worker preferences.
The other “face” of unions, other than the voice face, is the monopoly face. One the one hand economists generally recognize that this is a problem with unions, not a benefit. On the other hand, many non-economists who favor unions use this as an explicit justification unions. If you see anti-competitive behavior as an unintended downside of unions, then one can draw parallels to corporations. If, however, you see anti-competitive behavior as a reason that unions exist, then the comparison falls apart.
The most important difference between the two is that unions suffer from a much more problematic fundamental legal framework. Labor economists are much more likely to argue that the fundamental laws defining unions need reform than IO economists are to complain similarly about corporations.
So what are the complaints? Economists generally agree that worker voice is an important and useful function of unions, and yet unions are vastly diminished in the economy. The problem is that the laws regulating unions, in part due to the way they encourage antagonistic relations with management, have led to what is likely an undersupply of the fundamental purpose of unions: worker voice. As an institution they are failing to provide their primary benefit. On the other hand, the monopoly face of unions is also problematic and some economists argue incompatible with a dynamic economy, but labor laws discourage alternative forms of worker voice that are less prone to these anticompetitive effects.
This isn’t to say corporations are perfect, or that no unions provide net economic benefits. But to put things in overly reductive terms, many economists who are pro-union and many who are anti-union agree that the fundamental laws defining and regulating unions need reform. The same can not be said of corporations.
There is much more to be said about this issue and I don’t consider the above comprehensive overview, but rather a few aspects.
Writing in Bloomberg View, Ed Glaeser argues, among other things, that the GSEs should wait to sell the stock of housing they own slowly:
Exploring options makes sense, because selling homes too quickly means low prices, especially if you are trying to move thousands of foreclosed homes at once. Yet the government needs to be quite careful here as well, because renting homes that were meant to be owned is never easy.
The case for slow sales was made in a classic paper by David Genesove and Chris Mayer, which found that Boston condominium sellers with high loan-to-equity levels sold their units more slowly and got substantially higher prices. Steve Levitt and Chad Syverson found that real estate agents, who presumably know more about housing markets than ordinary sellers, typically take 9.5 days longer to sell their homes and receive 3.7 percent higher prices, holding everything else constant.
In a frictionless, efficient market for a commodity good the government could not expect to make money by holding on to the houses and renting them since the net present value of the returns to renting for a year and then selling would be equal to the price they could get for the houses today. Glaeser cites Genesove and Mayer as providing justification for why this might not be the case. However, it is my recollection of this paper that the way that a home seller increases the sale price by waiting is through housing being in a matching market. In this kind of market, the seller gets a higher price by waiting for a better matched buyer. The problem here is that in a matching market you presumably find a better buyer by having the house on the market for longer, not simply by waiting until a later date to sell it. If I recall correctly, this is what Genesove and Mayer argue. In this case, Glaeser’s argument for renting and waiting to sell -at least as justified by the matching market- does not hold.
One could still argue that the optimal sale time of a stock of houses is slow based on the literature on forced sales, which Glaeser also cites. So this is not to say the rental idea is not a good one relative to quickly dumping all the houses onto the market, just that one should caution against interpreting the literature for time-on-the-market as applying to units which are being rented, and thus are not in fact on the market.
David Wessel at the Wall Street Journal reports that President Obama will nominate Alan Krueger to be the new head of the CEA. It’s interesting to note that, among his other areas of research, Krueger done important work on occupational licensing. Here is a paper he co-authored with Morris Kleiner showing that 35% of jobs are licensed or certified by the government. There they report:
Our estimates of the relationship of occupational licensing and wages is consistent with the hypothesized role by members of an occupation to raise wages by using the powers of government to drive up requirements and capture work for the regulated workers for larger geographic areas. These estimates suggest a strong role for the monopoly face of licensing in the labor market. Indeed, the wage premium associated with licensing is strikingly similar to that found in studies of the effect of unions on wages.
And here is an earlier paper, also with Kleiner, on the same. If one is concerned about lowering the long-term unemployment rate, improving the functioning of labor markets, and making it easier for workers to enter into more skilled service jobs, occupational licensing is a good place to look.
Wessel also notes that Carl Shapiro is also being nominated to the CEA. Importantly, Shapiro has done work on patents and antitrust. Here is a summary of a relevant paper:
Economists and policy makers have long recognized that innovators must be able to appropriate a reasonable portion of the social benefits of their innovations if innovation is to be suitably rewarded and encouraged. However, this paper identifies a number of specific fact patterns under which the current U.S. patent system allows patent holders to capture private rewards that exceed their social contributions. Such excessive patentee rewards are socially costly, since they raise the deadweight loss associated with the patent system and discourage innovation by others. Economic efficiency is promoted if rewards to patent holders are aligned with and do not exceed their social contributions. This paper analyzes two major reforms to the patent system designed to spur innovation by better aligning the rewards and contributions of patent holders: establishing an independent invention defense in patent infringement cases, and strengthening the procedures by which patents are re-examined after they are issued. Three additional reforms relating to patent litigation are also studied: limiting the use of injunctions, clarifying the way in which “reasonable royalties” are calculated, and narrowing the definition of “willful infringement.”
The destruction in productive capital can easily mean a hurricane has a net negative economic impact, and not just on wealth but on the flow of economic activity. The positive economic impact of a hurricane comes from households and businesses stocking up on consumption goods and purchasing new capital, perhaps to replace old capital, e.g. buying a new sub-pump because the old one is worn out. This is why a hurricane that is expected to be huge but turns out to be much smaller is the most likely to have a positive economic impact: spending increases but capital is not destroyed.
An important question is how much of the spending will just be short term shifts from the next few weeks into today, as in the case where households stocked up on foods and will eat it over the next few weeks. I think households and business have a lot of what you could call small capital and inventory that just sits around for a long-time, like flashlights and candles, and if this is economic activity shifted forward it is likely to come from farther in the future, making it more likely to have a positive economic impact.
Another thing to consider is prevented economic activity, like restaurant and movie visits pre-empted. Or, say, entire cities being shut down. Here again, the best case scenario is the hurricane is very small.
In a recent post, Karl offered a theory as to why house prices are sticky downward. In short, he argues that house is worth less when it is being sold in a neighborhood with a lot of foreclosures than when it is being sold in a neighborhood with few foreclosures. Foreclosure sellers in an empty neighborhood are in effect playing a game of chicken then, where each wants to be the last to sell so that they can sell into a fuller neighborhood.
This is an interesting theory, and I’d venture it’s going on to some extent. I’m pretty sure you could find a way to test it. However, I think nominal rigidity can be found even in areas where foreclosures are relatively low. The literature on foreclosures suggests they have an impact in the neighborhood of 1% on house values within 1/8 of a mile. Given the costs of holding real estate, including the depreciation, maintenance, and lost value of the flow of services, I doubt it would be profitable for banks to play this game very long in areas with few foreclosures. Second, if the current owners are owner-occupiers, then the houses aren’t vacant, so there is no “empty neighborhood” effect. This means some homes must be owned by non-owner occupiers. It seems unlikely to me that in areas with few foreclosed homes and few non-owner-occupied homes you’d observe a lack of nominal stickiness. Nonetheless, I would not be surprised if this effect explained some nominal stickiness.
To understand how stickiness can happen, it helps to conceptualize the housing market as a matching market. Homes and buyers are highly heterogeneous, and there is no “market price” per se. Rather there is a price for a pair of buyers and sellers. This means that a seller can, ceteris paribus, always hold out longer for a buyer with a higher valuation of the house. The question is, why do sellers wait too long sometimes, and why wait longer for better matches when the market is down?
There is some literature on this that provides evidence for few hypothesis. a 1997 AER paper from Genesove and Mayer argue that the issue stems from a sellers desire to sell at a high enough price to get a 20% downpayment on their next home. Consistent with this, they find that sellers with higher LTVs are on the market for a longer time, set a higher asking price, and in the end get a higher price.
A 2001 QJE paper from Mayer and Genesove chalks up some of the problem to loss aversion. Sellers have a nominal number they paid for their house, and they are willing to wait for a possibly non profit maximizing amount of time until a high valuation buyer comes along. They find evidence that sellers with nominal losses have a longer time on the market, set higher list prices, and attain a higher selling price. They also find evidence that of the LTV effect from the aforementioned paper, although after controlling for nominal loss aversion the LTV effect is less strong.
So what can be down about this? Countercyclical or subsidized downpayment requirements could also be of use. This provides support for those who have argued that a downpayment subsidy should replace the mortgage interest tax deduction. Encouraging insurance that protects against nominal losses would encourage homeowners to sell sooner. Of course the best policy to fight nominal loss aversion is simply inflation.
I want to draw attention to this analogy of Eli Dourado’s from a few months ago because it has stuck with me, and I find myself thinking about it often. In it, he says that our restrictions to immigration are attempts to preserve our advantaged positions and are similar to those who sought to preserve aristocracy:
It is perhaps unsurprising that those who think they benefit from the current system wish to keep it. They trot out all kinds of practical-sounding excuses for why we cannot completely open the border. All of these reasons have analogs in the system of class-based privilege. Most of us, I imagine, would like to think that if we were aristocrats of centuries past, we would see through the lameness of the arguments for using the state to keep down the lower classes. Yet the widespread opposition to open borders today shows that we are not that good.
I only disagree with this to the extent that I don’t think it applies to all opponents of open borders. My own opposition, for instance, is I think not grounded in any desire to preserve privilege, and fairly strong on cosmopolitan utilitarian grounds. Nevertheless, for many immigration opponents, I think his charge holds and that more people should consider it.
Bryan Caplan is quoted as having said the following about Robin Hanson:
“When the typical economist tells me about his latest research, my standard reaction is ‘Eh, maybe.’ Then I forget about it. When Robin Hanson tells me about his latest research, my standard reaction is ‘No way! Impossible!’ Then I think about it for years.”
I disagree with Eli often -although in the grand scheme of things we are not so far apart- but I think something similar could be said about him, in that his ideas often sound radical at first pass, but they stick with you and provoke much thinking.
The ol’ CAFE standards debate is floating around the blogosphere again thanks to new higher rates on the way. Instead of writing anything substantive about it I want to point to an excellent post from Ed Dolan that says pretty much everything that needs to be said on the issue.
For example, he reports on a newer study that shows price elasticities once proclaimed to have fallen are now on their way back up, and in the range -0.4 to -0.8.
His post also nicely presents some externality based arguments against CAFE standards:
The tendency of more fuel-efficient vehicles to induce additional driving is known as the “rebound effect.”… [T]he rebound effect causes an absolute increase in those externalities that are proportional to miles driven, including road congestion and traffic accidents. It also increases the cost of road maintenance, because the wear and tear from more miles driven is only partly offset by the lower average weight of high-mileage vehicles.
Note that these externalities are ones that in other contexts are frequently (and rightly) appealed to by the same people who argue for CAFE standards.
In addition, Dolan draws our attention to this graph showing how fuel cost is related to consumption across OECD countries:
As he says, there is a convincingly tight relationship between price and quantity… go figure!
For some good analysis of the new fuel economy standards for big rigs I recommend Megan McArdle’s take.
In the wake of the S&P downgrade, Scott Sumner featured some comments by David Levey, the former Director of Sovereign Ratings for Moody’s, who during his tenure there wrote Moody’s Sovereign Rating Methodology Handbook. Despite his agreement that the United States’ “long-term debt outlook is deteriorating under the pressure of rising entitlement costs and an inefficient, distortionary tax system”, David argued that we have “extra leeway” due to the “the global role of the dollar and the central position of US bond markets”. I had an email discussion with David about the ratings agencies and his position on the downgrade. A lightly edited version follows:
Adam: Are the judgements you’re making based upon S&P’s recently updated Sovereign Government Rating Methodology and Assumptions, or the guidelines used when you were at S&P? I have only looked at the new guidelines, and I know there was a change made after public comment on proposed rules. So upon which methods are you basing your judgement? And would you say the methodological change is consquential in this regard?
David: Hard to answer the first part of your query, since I was at Moody’s, not S&P. Don’t feel bad about the mix-up. During my working years, even very sophisticated investors would quickly forget which agency had made which rating move and in which order. And any dumb move on either’s part would harm the reputation of both. On methodology, things changed in the mid-2000s. Under pressure from regulators and issuers, the agencies were forced to “open the black box” and become much more explicit about their criteria, scorings, weights attached to various factors, etc. There was a tendency to move to a “scientistic”, quantitative, formulaic approach. I tended to resist that (being a great admirer of Hayek). I saw risk assessment as a multidisciplinary, highly qualitative, judgment process involving a varied weighting of factors. It was not sufficient to assign likelihoods to various risk scenarios in the economic and political areas. The importance of these factors would vary according to each country’s “stage of development” and specific institutional features.
BTW, I never believed that we were somehow smarter than all the other bank/hedge fund analysts doing the same kind of assessment. Our only special claim was that we could be “unbiased” because the company held no financial assets. Of course, that still leaves open all the perverse incentives and “rating shopping” practices that contributed to the agencies’ awful performance in the MBS/CDO markets.
Adam: I also think you’re argument, with a slight modification, is not so different than S&P’s. Here is how I would change your’s to make them consistent:
The bottom line is that the global role of the dollar and the central position of US bond markets make somewhat elevated debt ratios more compatible with a Aaa rating than is the case for other countries, another version of the US’s “exorbitant privilege”. But that extra leeway is finite and serious reforms to entitlement programs, particularly Medicare, must be made in a reasonable time horizon. Given the current deterioration of and divisiveness in fiscal policy, we view the threat that serious reforms are not made in a reasonable time non-negligible.Thus there is a small but significant risk that within the next ten years. global investors will eventually conclude that our political system is incapable of making the needed changes and turn away from US assets, regardless of the institutional strengths of US markets.
How far are you from my edited version of your views? And would this be sufficient for a downgrade?
David: The long-term forecasts for government debt — depending as they do mainly on demographic and medical cost trends — haven’t changed much. We’re just more aware of them and the divisiveness you mention was inevitably going to arise as painful choices got closer and key groups — like the elderly — began to realize what they might be in for. The divisiveness can alternatively be viewed positively as a signal that the intensive social bargaining and political negotiations necessary for a solution are arriving more rapidly than we previously expected.
You say that my argument and S&P’s are not that far apart. No reason they should be. The difference in expected probability of default for a one-notch downgrade near the top of the scale is tiny. The problem is that the symbolic value of a AAA/Aaa makes a downgrade from that level significant far beyond its intrinsic significance. In any case, even with the new wording, I would still total up all the relevant considerations as leaving the US in the AAA category — but maybe not at its very top.
Adam: Felix Salmon characterizes the difference between Moody’s and S&P’s ratings objectives as S&P being only interested in the probability of default, whereas Moody’s is not interested in the the probability of default per se, but rather the expected losses. In addition, he says S&P explicitly does not intend their ratings to be a market signal, whereas Moody’s does. Do you agree with Felix’s characterization of their differences? And if there are differences between agencies in what they intend their ratings to be, is your judgement that S&P shouldn’t have downgraded them based on what they intend their ratings to be, or based on Moody’s intention, or something else?
David: Not an easy question to answer succinctly, but here goes…
I think Felix is wrong. Since S&P has not been as explicit as Moody’s about what their ratings mean, some indirect evidence has to be used. First, S&P “notches” for subordinated debt, meaning that they are taking into account that a default on that debt is likely to have a greater severity than on senior debt. Second, market participants would find ratings almost impossible to use without comparability of meaning. So — in a sense — the markets more or less force equivalence of meaning on the agencies. Third, if the meanings were that different, there would be a lot more “split ratings” (situations where the agencies rate differently) than there are. So, if there is a disagreement between Moody’s (and myself) and S&P on the U.S. rating, it is a substantive one, based on judgments of the likelihood of fundamental reforms to spending and taxation, alongside the financial market characteristics I referred to in my initial statement.
In your comments on Felix’s comments on Nate Silver’s comments on S&P’s decision, you make a point which I think is only half right. You say that sovereign defaults “are always political, rather than economic” and that “A sovereign credit rating is therefore primarily a function of a country’s willingness to pay, rather than its ability to pay.” The truth, however, is more complex. Neither willingness nor ability can be defined independent of the other. “Willingness” depends on political calculations of the degree of sacrifice that would be required to make payment, which in turn depends on the financial resources available or easily raised. “Ability” depends on how much additional resources for debt payment the government can “squeeze out” through reductions in spending or increases in taxation — a political consideration. So the relation between them is -to use an old phrase-“dialectical” and the analysis is based on what Adam Smith called “political economy”. This may sound like “scholastic” nit-picking, but the point is vital for guiding the rating decision process.
“America is a scooter-bound glutton who, when its continuously increasing mass finally overwhelms the doughtiest scooter’s capacities, shakes its fat fists like a mad baby and demands deliverance from the laws of physics.”
He has a serious point to make about the unsustainability of our collective fiscal demands, all of which is dwarfed by this quote.
I am channeling Ed Leamer, whom I chided in 2007 for denying the possibility of a recession even though his models were flashing red.
The models say “recession;” the mind says “no way.”
I’m going with the mind. This time the problems in housing will stay in housing. If you are a builder or a broker, it will feel like a deep depression. The rest of us will hardly notice.
Obviously, that was spectacularly wrong.
Well, now here we are a few years later and as ironic as it is I can’t help thinking something similar.
I look at a lot of fundamentals but at the end of the day the money markets drive my forecasts. The money markets are telling me in every possible way that recession is coming. Liquidity demand is rising, inflation expectations are falling, nominal interests rates are collapsing.
However, like Leamer in 2007, I am hard pressed to see what is left to recess? At the time Leamer doubted a recession because he didn’t think there were enough manufacturing jobs left to lose.
This time, I look at construction and local government and think the same thing. The cyclical employment sectors are already so far down. Are we going to start losing jobs in Health Care and Education at this point?
Its possible but its just so hard to wrap your mind around. It’s a macro-economic story that’s never been told.
The US, and world economy needs the Fed to act today, and markets seem to be indicating that they believe that the Fed will act. This is the same situation we found ourselves in during the fall of ’08. Growth is barely even anemic, and markets are indicating that they expect future NGDP growth to slow. Headline inflation has subsided, and the recent “major” blip in core inflation has turned out to to be a fluke — inflation is still running below the Fed’s implicit target. Combined with that, markets have roundly given the finger to S&P, and world troubles are pushing people into dollar assets, exacerbating the problems that we are experiencing with elevated money demand.
The Fed needs to do something bold today, before we fall off the cliff again, just like in October/November 2008…we’ve seen when happens when passively tight monetary policy causes the economy to limp along…once the buildup of balance sheet problems, falling asset prices, and increased demand for money reaches a head, the tipping point comes quickly and painfully. However, this time we’ll likely experience actual deflation, which will likely become a deflationary trend due to the timidity of our central bank.
So Bernanke, please give the hawks the finger for now, and do the right thing. The future of the US economy desperately needs it.
CNBC had this to say
Standard & Poor’s spoke loudly and clearly when it downgraded US debt, but the Treasury market on Monday didn’t appear to be listening.
While stock markets were selling off around the world bonds rallied. The 30-year bond gained more than a point in price as investors sent their own clear message that in times of turmoil, Treasurys were still the safest house on the block.
The movements seemed to suggest that S&P, for all the bluster and bold headlines its move created, was not calling the shots.
All over the media and my social media network people keep saying things like this. However, this is just the wrong way to think about the world.
Let me explain this way. Lets forget about S&P or downgrades or Europe or any of that.
I was shocked and appalled by the way the debt ceiling debate was handled. I was even more appalled that some people in positions of power seemed to endorse this as the new normal. Playing games with the global economy is no joke and no way for the leaders of the most powerful nation in the world to behave.
In my mind the political mess in Washington was worth a downgrade. And, indeed, I felt less safe than I did a month or two ago about the world and the fate of humanity.
However, what should I do in response to that? I should buy US Treasuries. Yes, buy.
Because you cannot escape US default risk. Its not like you could go out and buy something else that would guarantee you income in the event the US government defaulted. I am not even sure that investing in farmland or other wild schemes would do it.
Certainly there is no place to stash the trillions of dollars that now sit in Treasuries.
You have to buy Treasuries. There is no alternative.
This is why my reaction to the debacle wasn’t. OMG sell Treasuries. It was OMG we need to create an alternative to Treasuries and fast.
Right now, there is just no way out but through.
The money quote
S&P’s assessment is only remotely serious if you assume that this particular Congress, with its huge contingent of crazy Tea Partiers, is going to serve in perpetuity. But this Congress isn’t going to serve in perpetuity — there are elections next year, and many of the Tea Party freshmen are likely to lose.
They won in 2010 because it was a “wave election” in the middle of a very severe economic slump. But 2012 is a presidential election cycle with an incumbent Democratic president. A lot of these Tea Partiers who won in traditionally Democratic districts (and swing districts) are going to lose. In fact, it’s probably even odds that the Dems take back the House.
The simple fact is that the Tea Partiers are almost certainly at the height of their power in this Congress. And no, the debt ceiling debate doesn’t reflect some sort of secular change in US policymaking — the next time there’s a Republican president, House Republicans will be all about raising the debt ceiling, and Democrats won’t engage in the same kind of political brinksmanship. You’d have to be stunningly naïve not to believe this.
There have also been plenty of political de-escalations over the years — Republicans didn’t shut down the government every year after 1995, for instance. After Tom DeLay won the Medicare Part D vote by holding the vote open for 3 hours, everyone claimed that this would be the new normal on all controversial votes. Didn’t happen. There are plenty of one-off political confrontations. Simply assuming that every political confrontation represents a secular change in US politics and policymaking is ridiculous.
Points all well taken. I’ll have to think this through more but off the cuff I will say the shock factor in seeing what went down with the debt ceiling debate was so intense that it definitely moved the needle on my perception of US creditworthiness.
Seeing that this sort of thing could happen and then hearing Mitch McConnell proclaim that he intends for it to be the new normal is deeply disconcerting.
Perhaps, when heads cool we will look back and see that there never really was a chance at default and that everything was under control despite the theatrics. At this point, however, I don’t see it.
I’ve been wondering how much of last weeks tumbling market was due to rumors that an S&P downgrade was imminent. Here is one claim on this matter that indicates the answer is at least some of it:
At 8 a.m. Friday, S.& P. convened a global conference call of its sovereign rating committee… By 10 a.m., they’d reached a majority decision — the United States no longer was entitled to its top rating…
Rumors of a downgrade were already swirling in the markets — a prime reason the Dow dove more than 200 points at lunchtime, and at 1:15 p.m., the three men called the Treasury to inform them of the decision. “They were not pleased with the news,” Mr. Beers said.
I’ve been trying to pin down where Fitch stands on a downgrade. On the one hand, in the wake of the debt ceiling being raised Fitch and Moody’s were said to reaffirm AAA rating. Media outlets were reporting it like this:
Moody’s Investors Service and Fitch Ratings reaffirmed their triple-A rating for the United States…
On the other hand, Fitch said a full review was under way and would be completed within a month. So might the full review include a downgrade, or is that off the table as the AAA rating has been reaffirmed? A quote from a Fitch spokeperson clears this up:
Analysts from Fitch Ratings were in their offices over the weekend, churning through financial data. The company has said it may take all month to decide. “Our rating is triple A until the day it changes,” said David Riley, the head of global government debt at Fitch Ratings from his office in London. “That being said, we haven’t formally reaffirmed the rating.”
Moody’s reaffirmed the country’s AAA, though it did put the country on negative outlook on Tuesday. The company’s sovereign analyst said Saturday the company is not as concerned about political gridlock.
So despite media reports like those above, Fitch has not “formally reaffirmed” the AAA rating, and a downgrade appears to be on the table for their upcoming review.
One thing to consider is that an S&P downgrade could make a Fitch downgrade more or less likely. If this spurns politicians to action, it will have helped fix the problem it identified, effectively falsifying itself. However, if the downgrade causes rates to increase or hurts the economy through weaker consumer sentiment or some other Animal Spirit / Confidence Fairy effect, then it would make our fiscal situation even worse.
But what would cause Fitch to downgrade? Reports indicate they are less concerned about political gridlock, and appear to be focused on whether either the super committee’s $1.5 trillion in desired cuts or the automatic trigger backup plan will materialize. But how much clearer will that become within the next month? Are there any signals Washington could send that would indicate they’re likely to back out of these cuts?
Karl and China are in agreement about the safety of U.S. financial assets. Karl writes:
“We should begin to talk and think seriously about how to Internationalize the financial system and perhaps secure at least a viable competitor to the US in the issuance of safe assets.”
Echoing this, China’s official Xinhua news agency writes:
“International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country…”
There may be no alternative to U.S. financial assets right now, but people are certainly starting to look hard.
There’s a lot of anger and indignation being expressed at parties passing judgement on the U.S. for it’s political and economic problems. Here is Paul Krugman mad at S&P:
So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment….
So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.
I understand people who want to argue with S&P’s logic, I think there is a case to be made that they are in fact wrong. Maybe the possibility of a loss of confidence in U.S. debt should be of zero concern right now, and a debt crisis is extremely unlikely. I think the uncertainty here makes it difficult to say that is not a serious possibility. On the other hand, perhaps Rogoff is right and we do need to address our long-term fiscal position immediately or risk another crisis. This is a debate to have, and I can understand people being angry if they think S&P’s analysis is wrongheaded and apt to make the situation worse.
But I’m not sure why people would attack the fact that they are judging in the first place. If S&P has no authority and is in no position to decide whether a country has an AA+ rating, then they are in no position to decide whether they have an AAA rating. They didn’t start passing judgement yesterday. They were passing judgement last week, last month, and last year.
Maybe we no longer want ratings agencies to have the legal power we’ve bestowed upon them, but surely we don’t want ratings agencies to have the legal power and only the ability to make positive judgements, or judgements that ignore crucial aspects like the “effectiveness, stability, and predictability of the sovereign’s policymaking and political institutions”.
I also want to highlight that despite his criticisms, Krugman does have a lot of agreement with the logic of the report, which cites debt ceiling brinksmanship as part of the problem. He writes:
On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.
I think the value of S&P’s action is that it has given both sides ammo where they need it, which seems like it should strengthen our ability to make a deal. Ironically, perhaps the act of issuing this report will help make the conclusions of the report less true. I hope so anyway.
Short on time. I’ll make a few comments
- Roughly inline with my expectations. Not a strong report. Auto supply issues and higher gasoline prices have sent a bit of a jolt through the economy. But not on par with devastation
- Note that private sector jobs came in at 154K. That’s actually a decent number. If the government sector were adding a normal 30K or so then we would have 185K. That’s a recovery level report. At this point job creation is slow because government is downsizing.
- Government downsizing will not continue forever. I know many economists and commentators are focused on the contractionary nature of the budget deal. Don’t be. As I have said, there are basically two types of government workers: teachers and not-teachers. What we’ve seen over the last year is a sharp drop in State and Local employment and a big chunk of that is teachers. This will not continue forever. Local political forces are different than national ones and the push-back against little Johnny having 45 students in his class, or Maggie getting her AP class canceled will be strong and bipartisan.
A few other notes
Construction added at 8K. Its too early to call this the beginning of an upswing, but we should be seeing stronger number here as the year goes on.
Manufacturing added a very nice 24K. That is, a very good number considering how weak the ISM report was.
Mining is of course up and we should expect it to be as long as oil is above 60 – 70 a barrel.
Both retail and leisure and hospitality showed growth but not near what they are capable of. I think we are seeing gasoline prices here. Still the growth is important because these are the industries that employ low skilled workers
FIRE and Information shrank. Our two superstars are still reeling from what is most likely, actual structural transformations.
I still expect the government downsizing to end. That alone will give us stronger reports. I still expect construction to pick-up. That should improve the reports.
Where I am most concerned are with these manufacturing numbers. They do not seem sustainable or inline with my overall expectations. I could be really wrong and we could see a mini-renaissance. However, your baseline expectation has to be for manufacturing employment to fall and to count a slow rate of fall as a strong report.
Yet, right now we are getting 25% of our job growth from manufacturing.
Sane conservative economists recognize that not raising the debt ceiling on August 2nd would be a disaster. Sane conservatives understand that the ratings agencies will lower our credit rating if we won’t raise the ceiling, and that we have almost $500 billion in maturing treasuries that we need to roll over in August alone which, as UBS argues, is a problem:
“The mistaken view that interest payments to US Treasury-holders could easily be prioritized, avoiding default indefinitely. This view requires that investors willingly roll over their holdings of Treasury debt and does not take into account the sharp increase in interest rates that may result.”
As Lawrence White explains, and S&P agrees, prioritizing payments is a default:
“…if the federal government delays payment to anyone, then certainly in a common-sense sense, the government has defaulted on its obligations….I believe that the financial markets would not be copacetic [if bondholders were repaid but other creditors weren’t]….They would realize that the government was stiffing one set of claimants who are creditors, and the markets would worry that they might be next.”
Our lenders understand better than those arguing that we can simply cut government spending 30-40% overnight, and lenders understand that voters won’t tolerate having foreign banks get paid while they suffer. Neil Buchanan agrees:
“Foreign holders of Treasuries will understand that it is politically untenable to pay foreigners but not Americans…Can you imagine the firestorm if Americans were told that we cannot afford to pay Social Security recipients, because we have to pay foreign banks and governments first? …No matter how strong the argument that doing so is necessary to protect our credit rating, the bottom line is that the government would be favoring foreigners over Americans. Any foreign investor would know that this is not politically sustainable. They would have every reason to dump our bonds, or at least to require much higher rates of return.”
If interest rates go up, that $500 billion we need to roll over is going to be a lot more expensive. As Barry Eichengreen says, “[e]vidence that the inmates were running the asylum would almost certainly precipitate the wholesale liquidation of US Treasury bonds by foreign investors.”
If I haven’t convinced you that not lifting the ceiling would be hugely problematic, then perhaps these sane conservative economists (and Richard Posner) will:
Gary Becker: “That Congress will have to raise the debt limit this summer is a no-brainer since revenues are not anywhere near large enough to cover government spending. Without a boost in the ceiling, the federal government will be unable to pay its bills, including pay to federal employees.”
Keith Hennessey: “Congress must raise the debt limit. Not doing so would eventually lead to defaulting on Treasury bonds, a potentially catastrophic event.”
Douglas Holtz-Eakin – “Yes, Congress should raise the debt limit. Being a good steward of the U.S. credit rating means that it has to pay Obama’s credit-card bill. And it should do so as quickly as possible — on the day it returns from recess.”
And a video from Holtz-Eakin
Glenn Hubbard: “The debt ceiling must be raised – not doing so is irresponsible”
Richard Posner: “No doubt before the political and economic damage becomes too severe, the Republican radicals in the House of Representatives will relent and the ceiling on borrowing will be raised. Before that happens interest rates may rise, and stay higher, because of doubts about the basic competence of American government. Those doubts, plus the higher interest rates they engender, may deepen the current economic downturn, which in turn will reduce tax collections, increase transfer payments, and in both respects increase the federal deficit… Why Republicans prefer flirting with failing to raise the debt ceiling by the August 2 deadline to accepting the deal tentatively worked out between President Obama and Speaker Bohner…is a deep mystery.”
I’m trying not to get shrill here, it’s getting hard.
Arnold Kling has a quick, middle of the road summary of his take on the role of GSEs in the housing bubble . I feel like almost everyone has an ax to grind on this issue, and Arnold’s moderate -although not unprovocative- position is, as a result, not so commonly held, but I think quite reasonable and worth highlighting:
I feel pretty confident in arguing that Freddie and Fannie could have stopped the housing bubble by holding onto their credit standards of the early 1990’s. However, I would not be comfortable attributing their relaxation of credit standards to the affordable housing goals. I think that the management attitude toward risk changed exogenously. In part, this was due to new CEO’s with less experience in dealing with mortgage credit risk. As home prices rose, all sorts of high-risk loans performed well, and senior management misread this to indicate that it was safe to lower credit standards. Certainly, the political environment reinforced that decision. But the numerical affordable housing goals were not the dominant factor.
Jonathan Rauch, guest-blogging for Andrew Sullivan, has a bunch of stupid things to say about the blogosphere. Of course he’s being stupid on purpose, or to be more refined about it, he’s exaggerating all of his points and wording them with maximum hyperbole and provocation. His purpose here is to prove a point about the blogosphere: people get more pageviews and blog response by saying something outrageous, and that, among other things, is what leads the overall discourse in the blogosphere down the drain.
So am I proving Rauch’s point by calling attention to his hyperbolic post, or can I disprove it by reading past his provocations and purposefully rough-hewn arguments and pulling out -and refuting- his true points? Is this a test? In any case, Rauch’s core argument is wildly and obviously wrong, and it says way more about him than it does about blogs.
His first point is that “…the average quality of newspapers and (published) novels is far, far better than the average quality of blog posts (and—ugh!—comments). This is because people pay for newspapers and novels”
The average quality of blog posts, books, or any media, is relevant to the reader only to the extent that this increases the cost of finding what they read. In this way, complaining about the average quality of blogs is like a fisherman complaining about the average quality of fish in a lake rather than the quality of the fish he caught and how long it took to catch them. Also like fishing, the more time you spend reading blogs the better you get at reeling in good ones, and the less average quality matters to you. Being a clear novice, Rauch is probably pulling in a lot of small, inedible fish, and a fair share of boots. No wonder he’s mad about average quality, he has no idea what he’s doing. This he makes abundantly clear in his second point:
“If we had but world enough and time (that’s poetry, btw), we could search for good stuff all day long and the average low quality of the blogosphere might not matter. But average people on average time-budgets have to care if average quality drops, because that’s what they’re dealing with on an average day. “
The laughable idea that the way you find good blog posts is through brute force searching and spending all day says everything that needs to be said about how well Rauch understands how to consume information from blogs. One wonders if his failed attempts at becoming a daily blog reader each began by opening up Internet Explorer, directing it to Excite.com and searching for “internet blogs”.
His next point is that
“Yes, the new model is bringing a lot of new content into being. But most of it is bad. And it’s displacing a lot of better content, by destroying the business model for quality.”
I can understand why the struggle of old media companies would anger an old media journalist. But one can be furious about the impacts of the blogosphere on old media and still impartially judge the quality and utility of the of the blogosphere. Or at least one should be able to do this. Some, it seems, are unable. The idea that blogs are destroying good journalism is much more useful for understanding Rauch’s diatribe than for understanding the quality or usefulness of blogs.
To his last point:
“Yes, there’s good stuff out there. But when you find a medium in which 99 percent, or whatever, of what’s produced is bad, there is a problem with the medium.”
Again one can’t help but see the frustration of someone who has simply not mastered the form as a user. His entire position can be summed up as: “How are you supposed to work this this darned contraption?!” His opinion here has about as much merit as grandpa’s, who unable to hook up and operate the VCR proclaimed it worthless.
David Brooks recent piece on Diane Ravitch has lead the New York Times to have Ravitch engage in a “Sunday Dialogue” where she answers reader questions. Whitney Tilson, a frequent Ravitch critic, writes in with a common complaint:
…while it’s very clear what Ms. Ravitch is against (she’s a vocal, clever and, sadly, effective critic of what we reformers are doing), I can’t for the life of me figure out she’sfor.
Saying you want a good teacher in every classroom and a well-rounded, rigorous curriculum is as trite as saying you’re for motherhood and apple pie. What would Ms. Ravitch say to John White and Cami Anderson, who just took over two of the toughest school systems in America, in New Orleans and Newark? What would be the top three to five things Ms. Ravitch would have them do in their first year?
There are two parts to Ravitch’s reply that are relevant, one addresses all of her correspondents, and the other addressed to Tilson specifically. I don’t think her response does much to defend herself against Whitney’s charges:
Good schools are no mystery. They have a dedicated principal, a stable staff with a mix of veterans and young teachers, and a strong curriculum that includes not only basic skills but the arts, history, civics, science, world languages, literature and physical education. And they engage parents and community leaders to support their goals….
To Mr. Tilson: Why expect schools alone to close achievement gaps that begin at birth, when those gaps can be prevented in the first place? Decades of research by the Nobel Prize-winning economist James Heckman and others have found that early intervention is the single most effective policy we can invest in. Start with prenatal care. Teach new mothers how to help themselves and their children. Add a strong pre-kindergarten program so that children start school ready to learn.
If you’ll allow me to engage in some rather speculative predictions about the future, I have a vision I’d like to sketch out (for some reason) about what fast food service will look like in the not-so-distant future. The short of it is, smartphones will automatically place an order and pay for it for people on their way to work, school, or other routine destinations.
In large part, the necessary tech is already here. The payments system is obvious, as you can already buy apps and songs on your phone. The other main part is right around the corner, as Apple’s upcoming iOS5 will provide location based reminders that deliver a preprogrammed message when you are near a certain location. For instance, you can tell it to remind you to buy milk when your phone detects that you are in the grocery store. The only change I’m proposing is that reminders should be directed outward, to the retailers you are heading to.
This means that Dunkin Donuts will know when you are five minutes away, and will receive your order, all without you having to do anything. Then when you walk in to the store you pull up your Dunkin Donuts app, wave the barcode in front of a scanner, and the worker (or machine) will give you your order. The app could be time and date specific as well, so it won’t order unless you are five minutes from the Dunkin Donuts, and it’s a weekday, and it’s around 8am.
An even simpler version of this allows you to order on your smartphone before you leave the house, with the phone telling the store how long it will take you to get there, and therefore when they should start cooking. Think of this as taking the MTO machines in many food places and simply putting it in the smartphone. It’s easy to imagine how this future of retail could cut down on the number of retail food workers by 15% or even more.
Bruce Bartlett ends a post on Margaret Thatcher with the following observation
Mrs. Thatcher, like Reagan, moved her country in a conservative direction. But Mrs. Thatcher’s fiscal accomplishments were much more modest than many of today’s Republicans think.
The lesson they should learn from her is that it is very hard to shrink the size of government even when a strong leader has complete control of the legislature, that it takes many years of arduous work to do so and that at the end of the day it won’t shrink very much.
This echoes, one of my main points. The march of the welfare state rests on forces far more fundamental than come through in basic politics. There is no way that by simply winning elections you are going to change this dynamic.
A new NBER working paper investigates:
Germany experienced an even deeper fall in GDP in the Great Recession than the United States, with little employment loss. Employers’ reticence to hire in the preceding expansion, associated in part with a lack of confidence it would last, contributed to an employment shortfall equivalent to 40 percent of the missing employment decline in the recession. Another 20 percent may be explained by wage moderation. A third important element was the widespread adoption of working time accounts, which permit employers to avoid overtime pay if hours per worker average to standard hours over a window of time. We find that this provided disincentives for employers to lay off workers in the downturn. Although the overall cuts in hours per worker were consistent with the severity of the Great Recession, reduction of working time account balances substituted for traditional government-sponsored short-time work.
Here is an older non-gated version.
Tim Slekar at the Huffington Post tries to give readers a lecture in “stats 101” and ends up making an elementary error himself. Tim writes:
For those that forgot stat 101, correlation does not mean causation. Example: If you take a sample of people involved in automobile accidents on their way to work and ask the sample if they had breakfast and then checked the correlation between eating breakfast and automobile accidents — it would be through the roof. But what does this mean? Nothing from a cause and effect stand point. Eating breakfast does not cause car accidents — period. Remember, correlation does not mean causation. However, this simple statistical rule doesn’t seem to matter to the reformers.
If you took a sample of people involved in accidents and looked at the correlation between eating breakfast and being in an accident it wouldn’t be “through the roof”, it would be undefined. Let X be a dummy variable being 1 if someone ate breakfast and 0 if they didn’t, and let Y be a dummy variable equal to 1 if someone is involved in an accident, and 0 if they weren’t. A dataset like Tim is talking about might look like this:
Notice that all of the Ys are equal to one, because Tim said we are sampling people who have been involved in an accident. The problem is, as they teach you in stats 101, the formula for correlation is cov(X,Y)/std_dev(X)*std_dev(Y), where cov is covariance, and std_dev is the standard deviation. The standard deviation of a number that is always equal to 1 is zero. And so the correlation has a zero in the denominator, which is undefined, not “through the roof”.
Reihan defends the fixed-pie model of the economy that conservatives elsewhere reject, which Tim levels as evidence of conservative hypocrisy. If I could try and summarize Reihan’s position very succinctly, it would be that at some level, pies become fixed. Put into economics-speak, in many systems, including our economy, and it’s various micro-economies, at some scale returns diminish, and then they become negative.
I think Matt Yglesias and others might point to Manhattan and Honk Kong with their 10,000+ people per square feet and argue that we are nowhere near negative returns in the country as a whole. But Reihan, I’m guessing, would argue that Manhattan did not get to it’s level of density over night, and that it is the sustainable flow, not the sustainable level, that he is worried we would go over. In terms of what the costs, or losses the country would suffer by going “too fast” with immigration, I think Reihan lays it out nicely:
“There are, however, congestion and other costs associated with an increase in the size of the population, which vary according to the demographic characteristics of the population. Given that the United States is a mixed economy in which we devote a large share of public resources to educating children, incarcerating criminal offenders, providing health services to the indigent, etc., one can raise legitimate questions about what constitutes an economically sustainable population influx consistent with maintaining public institutions in some recognizable form.”
There are two important points to make here, one about skilled immigration, and one about immigration overall. Let me start with the latter. Unlike the more open borders people, I tend to worry that at some level of immigration, some of our cultural, legal, and economic institutions might give. I know that’s sort of a mushy and imprecise claim, and it’s not satisfying to keep millions of people from drastically improving their lives for the sake of mushy and imprecise ideas, but I think part of the reason that this country is capable of improving lives so greatly, and is such a beacon and desirable destination to so many people is precisely because of the cultural, legal, and economic institutions we have here.
My concerns about borders that open up too much or too fast is both that these institutions degrade, and that Americans will react to the degradation of these institutions by choosing to close the doors even more drastically than they are now. We are a democracy after all, and that is part of the draw of this place. This is why I propose a gradual opening of the gates, and moving them farther and farther open. To me the degradation of institutions is purely speculation at this point: America is not suffering from a blight of immigrants. At current margins I believe both skilled and unskilled immigrants are a net plus, and at the very least I think we can all agree they are no serious threat to our institutions. We’ve got an amazing, powerful, engine for freedom and wealth here, and we’re driving her around at 15 mph because we’re worried that the engine might blow out at 100 mph. Let’s open her up slowly and see what she can handle, because it’s certainly more than this.
The second point I want to make is about skilled immigration. All the reasons that Reihan argues that the pie is fixed at some level do not apply to high-skilled, english speaking immigrants. In fact the more skilled immigrants we let in the farther we can go before we encounter fixed-pieism. In other words, skilled enlglish immigrants provide us with more tax money to support the government part of our mixed economy, and they tend to not go to jail, and they tend to provide educated well-behaved children to our school systems. They grow the pie. Jose Vargas is a perfect example. He is a force that strengthens, not stretches, our institutions. If a fixed pie is what we are worried about with respect to immigration, then we need to divide the conversation into two pieces: skilled and unskilled immigrants.
A final thing I’d like to address is Reihan’s response to a comparison from Tim Lee. First, here is Tim:
Entering the country without government permission is illegal, and probably should be so. The federal government has any number of powers to enforce the law, including refusing to let you cross the border (leave the airport, etc), investigating over-stayed visas, limiting access to driver’s licenses, auditing employers, deporting people, and so forth. Objecting to any particular immigration enforcement mechanism isn’t the same thing as objecting to immigration regulations altogether. It’s perfectly coherent to say that the government should make a reasonable effort to prevent people from moving here illegally, but that certain types of particularly invasive enforcement methods (like employer verification) should be off the table. This is just how our legal system works.
But I also think speeding cameras are a bad idea because I sometimes think the posted speed limit is too low and I like the fact that I can ignore it and (mostly) not get caught. Similarly, our copyright laws are too strict; it’s a good thing that people can sometimes share content in circumstances that a strict reading of the law wouldn’t allow. In other words, the fact that people can mostly get away with breaking certain laws is a feature, not a bug, of our legal system. It provides a “safety valve” that ensures that stupid legislation doesn’t do too much damage.
The same point applies to immigration law. Obviously, we ought to enact sane immigration laws that make it easy for people like Jose Vargas to get a green card. But given that we haven’t done that, it’s a good thing—both for him and for the rest of us—that our enforcement system wasn’t effective enough to prevent him from taking a job here.
Again, there’s a huge double standard here. We American citizens take a strictly moralistic tone toward laws that we don’t personally have to follow. But “the rule of law” goes out the window when it comes to that pot you smoked in college, or the use taxes you haven’t paid on your Amazon purchases, or those pirated MP3s on your hard drive. When we’re talking about laws that actually affect us, we’re glad there’s some breathing room between the law on the books and what people actually get punished for.
And here is Reihan:
“When we violate copyright laws or when the authorities are lax in enforcing the speed limit, we don’t create a situation in which people are forced to lead a shadow life that will contribute to larger social problems. These infractions are of a fundamentally different kind. Now, one might object that we could then just give said people in the shadows a path to citizenship, thus solving the problem. But this would mean ceding authority over our immigration laws to those who are willing to break them.”
I think Tim is exactly right, and I don’t think these are as different as Reihan suggests. When we violate the speed limit we are potentially putting people at risk. When we violate copyright laws we are potentially discouraging those artists, or other artists, from creating more output in the future that we would all benefit from. When an illegal immigrant comes here they are *potentially* contributing to larger social problems. In each of these cases there is a risk, but not a certainty, of imposing costs on someone else. In the case of Jose Vargas, the man was clearly reducing social problems through his excellent writing.
The “shadow life” part seems like a cost born strictly by the immigrant, and I’d leave it to them to decide whether their lives were improved by coming or not, and staying or leaving. But I’m not sure if living in the shadows is a cost to the immigrants is a claim Reihan was actually trying to make, or if he simply meant the shadow life is what is contributing to larger social problems. If it’s the latter I’d be interested in some more elaboration here as to what the shadow life is and how it contributes to larger social problems.
Unsurprisingly from Reihan and Tim, I find this disagreements clarifying and thought provoking, and I’m glad to be seeing this exchange.
Everyone is talking today about Jose Antonio Vargas, the illegal immigrant who told his story recently in the New York Times. Dan Foster, at National Review, has sympathy for Jose the child who had little choice in becoming an illegal immigrant, but not for Jose the adult who chose to commit further illegalities in order to remain here:
The first part of Vargas’ story — a kid living and loving America for years before his shocking discovery that he has been made complicit in a crime — does indeed elicit sympathy. It’s stories like these that make me open, at least in principle, to something like a narrowly-tailored version of the “DREAM” Act. But the second part of his story, in which a fear- and shame-driven Vargas, with the aid of his family, perpetuated and compounded those crimes (Vargas eventually got around to what you might redundantly call fraudulent tax fraud, repeatedly reporting himself as a citizen rather than a “permanent resident”, when in fact he was neither), elicits from me nothing like the outpouring of support Vargas is already enjoying on the Left.
Punishing a minor by removing him from the culture he’s adopted as his own, for the crimes of his parents, does strike me as fundamentally unfair. But what liberals leave out of this story, time and again, is a competing — and in my view overriding — unfairness. Reihan has argued repeatedly, and effectively, that we should treat access to the U.S. economy, not to mention its extensive welfare state, as a scarce resource. We can debate and debate the best way of distributing this resource– from “not at all” to “come one, come all” and everywhere in between. But distributing it based on who manages most successfully to violate the law, at the expense of would-be immigrants who are honoring the process, is surely not a valid option.
Foster’s argument seems to be that it would be unfair to deport a minor who has little or no choice in the matter, but once that minor turns 18 the illegality is their choice, and it is no longer unfair to deport them. This is why he has pity for Jose the child, but the story of Jose the adult “elicits” from him “nothing like the outpouring of support Vargas is already enjoying on the Left”.
My question for Daniel is this: if he were in Jose Vargas position, what would he have done? Upon turning 18 would he have left this country and returned to the Philippines because it would be unfair for him to stay? Would he have sacrificed the life he knew here out of a sense of unfairness to other potential immigrants we aren’t letting in? Would he agree that the government should deport him?
I don’t think it is wrong for Jose Vargas to do what he could to stay in this country and keep the life he knew. I think Jose Vargas, and many of those who have risked much to be here, are the kind of people who would be alloted citizenship in an ideal and ethical system. He has the willingness and the ability to pay his way in any fair immigration scheme. He’s a net positive in our society. How many millions of immigrants a year are we away from a system where we have to tell highly skilled, highly educated people who believed themselves to be American that we are too full? I don’t think we will ever be that full, and we certainly aren’t now.
Until we get a fair immigration system, the way to get a fair result is for people who would have gotten here under the fair system to sneak in, and break the rules, and do what they can to stay.
In another, perhaps too quick and dirty for the Atlantic, let me respond to this by Robin Hanson.
We all want the things around us to be better. Yet today billions struggle year after year to make just a few things a bit better. But what if our meagre success was because we just didn’t have the right grand unified theory of betterness? What if someone someday discovered the basics of such a theory? Well then this person might use his basic betterness theory to make himself better in health, wealth, sexiness, organization, work ethic, etc. More important, that might help him make his betterness theory even better.
After several iterations this better person might have a much better betterness theory. Then he might quickly make everything around him much better. Not just better looking hair, better jokes, or better sleep. He might start a better business, and get better at getting investors to invest, customers to buy, and employees to work. Or he might focus on making better investments. Or he might run for office and get better at getting elected, and then make his city or nation run better. Or he might create a better weapon, revolution, or army, to conquer any who oppose him.
. . .
All of which is to say that fearing that a new grand unified theory of intelligence will let one machine suddenly take over the world isn’t that different from fearing that a grand unified theory of betterness will let one better person suddenly take over the world. This isn’t to say that such an thing is impossible, but rather that we’d sure want some clearer indications that such a theory even exists before taking such a fear especially seriously
I don’t think a betterness explosion is that far fetched of a concept. Indeed, we are in the middle of one right now. It’s the sustained period of economic growth after the industrial revolution.
The important concept – to my mind – is that this betterness revolution is ultimately limited by our ability to analysis and communicate information. There are various means we might think of for this process to change radically and with it the nature of the betterness revolution.
For various reasons the grand unified theory of betterness seems illusive. But the betterness box does not. Suppose that we EM a single smart person few thousand times, put all the EMs into one box and then turn up the speed 1 million times.
Could not the box conceivably design better faster boxes to put itself into, continuing a rapid betterness explosion? Would it not look to the rest of the world as if that single individual just “took over”
Over at The Atlantic today…
- Karl presses the question of whether there are too many homes in America
- Niklas argues that Keynes’ only useful insight was extreme liquidity preference, and calls Krugman “as close to a modern-day Keynes as anyone could ask for”
- I discuss how an illegal immigrant crackdown is impacting farmers in Georgia. Yesterday I talked about how house price declines are affecting divorce rates.
We’ll probably be slightly neglectful of ModeledBehavior.com for a little bit while we fill in for Megan. Make sure to stop over, and you’ll learn you can cook a mini-pie in a jar.
The relationship between the Amish and technology is not so absolutist as most probably imagine. A recent article on the use of Facebook among Amish teens illustrates the complex, varied, and surprising ways in which the so-called Plain People interact with technology:
There are no statistics to show how many Amish are on Facebook, the social networking site used by an estimated 500 million people worldwide. But some, in a community that shuns electricity in their homes, won’t buy cars and maintains traditional garb, say the number of Plain kids using Facebook — often logging on via their cellphones — appears to be increasing….
…Erik Wesner, an author who runs a blog called “Amish America,” said he corresponds with many Amish via email. Typically, he said, email is justified as a business concession…
…The Amish slowly, sometimes surreptitiously, adopt new technologies. A century ago, Amish bishops — who set the boundaries for what is and what isn’t permissible for their congregations — forbade phone ownership. Eventually, they permitted groups of Amish to install “community phones” in “phone shacks” outside homes. Then some of them allowed phones inside businesses….
One might speculate that increasing technology would erode Amish communities but unlike many other fundamentalist communities, the Amish seem to want children to have a real choice about whether they stay in the community, and to do so with their eyes wide open. This can be seen in the Amish tradition of rumspringa, which allows Amish youth to live life outside Amish rules and see what their lives would be like if they left the community. If full exposure to the temptations of the modern world were enough to lead to the decline of the Amish, then one would expect it to have happened already. As the article details, Amish children have always dabbled in new technologies:
Still, [one local] Amishman said, Amish youth have always been attracted to new technologies and trends. “When automobiles came out, some Amish rode in automobiles,” he said. “When Rollerblades became popular, some Amish Rollerbladed. Most anything that comes along, some Amish kids will pick it up.”
For now, the reaction to Facebook in Amish communities ranges from preaching against it directly to being completely unaware of it:
The Amishwoman at the stand near Gap said one local minister actually did preach against Facebook in recent weeks. Others, she said, are vaguely worried, aware that it’s happening but unsure how many are involved. And they’re also hampered by the fact that many older Amishmen and women simply don’t know what Facebook is.