Monthly Archives: January 2015

How to Make Manhattan More Dense

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Shlomo Angel and Patrick Lamson-Hall write,

densities in today’s Manhattan can increase again if we allowed its lower income residents—and lower income, given today’s housing prices, includes its middle income residents as well—to live in more cramped quarters and to consume less floor space per person. As long as public authorities can maintain acceptable elementary standards of health and safety—from access to water and sanitation, to proper ventilation and fire protection—there is no reason to restrict the housing options of lower income residents by mandating a minimum consumption of floor space. A contemporary densification policy may thus entail the removal of zoning and building standards that require minimum apartment sizes, allowing for the construction of micro apartments as well as single rooms sharing common facilities (formerly known as SROs, Single Room Occupancies). It may entail extending legal permission to subdivide larger apartments into smaller ones by furnishing them with additional kitchens and bathrooms. And it may also entail the passage of new regulations that eliminate the exclusionary restrictions now imposed by the boards of cooperatives and condominium associations on the leasing of apartments that are left empty to non-owners, as well as the prohibitions on the rental of rooms on a short or longer term basis.

Most interesting was their demonstration that Manhattan density peaked in 1910, then fell through 1980. Think of the elevator as increasing effective floor space and the subway as reducing the demand for housing right near factories.

December’s Medium-High Employment Growth

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My comments on the latest employment report:

1. Pay no attention to the household survey. That is true in any month. The household survey on a monthly basis contains much noise. The establishment survey is nearly all signal. The establishment survey shows gains of 250,000 jobs per month for the past several months.

2. Employment has a lot of momentum. A few years ago, I wrote,

I have 603 observations of three-month averages followed by one-month values.

327 have medium job growth in the three-month period followed by medium job growth in the next month.
112 have low job growth followed by low job growth
63 have medium followed by low
45 have medium followed by high
33 have low followed by medium
14 have high followed by medium
8 have high followed by high
1 has low followed by high (December 1970, looks fluky)
0 have high followed by low

3. My definition of “high” job growth is 350,000 per month. Medium is 50,000 to 350,000. So what we are experiencing is growth on the high end of medium.

4. What to make of the low increase in earnings–1.7 percent year over year? From the perspective of mid-1970s macro, you say that slow wage growth increased labor demand, raising employment. From the perspective of pre-1970s macro, you say. . .Whaa??? Another data point that lies off the Phillips Curve. If you take a PSST perspective, you say that you did not expect to see a Phillips Curve, anyway.

Now is a Great Time to Subsidize the Housing Market!

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From the WaPo.

The White House announced Wednesday that the Federal Housing Administration will significantly lower the fees it charges borrowers, a move designed to save individual home buyers hundreds of dollars annually and help jump-start the housing market.

It’s always a great time to buy a home–just ask a Realtor™. Similarly, it is always good public policy to jump-start the housing market–just ask anyone in the housing lobby.

One of the best times to jump-start the housing market was the early 2000s. If you need to be reminded of that, attend this event featuring Peter Wallison. Recently, I reviewed his latest book.

The Most Renegade Bank

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Michael Grunwald writes,

That bank currently has a portfolio of more than $3 trillion in loans, the bulk of them to about 8 million homeowners and 40 million students, the rest to a motley collection of farmers and fishermen, small businesses and giant exporters, clean-energy firms and fuel-efficient automakers, managed-care networks and historically black colleges, even countries like Israel and Tunisia. It has about 120 different credit programs but no consistent credit policy, requiring some borrowers to demonstrate credit-worthiness and others to demonstrate need, while giving student loans to just about anyone who wants one.

Read the whole thing.

Another excerpt:

When the U.S. government simply spends money to do stuff, it’s usually clear how much the stuff will cost to do. But that’s not true when the government lends money or guarantees loans by private lenders.

One idea I had for setting national economic priorities was to use scenario analysis to try to expose the risks in these programs. From a taxpayer perspective, this opacity is a bug. From a political perspective, of course, it’s a feature.

World Bank Says Have a Nice Day

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From Ian Talley of the WSJ.

A host of governments around the world don’t have enough income to buffer against growth risks and higher borrowing costs. “You might think that you have sustainable debt dynamics, but that can change dramatically,” said Ayhan Kose, a lead author of the bank’s latest Global Economic Prospects report. Part of the report was published late Wednesday.

Read the whole thing. It is hard to pick out the scariest sentence.

The way I think about institutions that rely heavily on debt is that there are two equilibria. In the good equilibrium, lenders are confident (rightly or wrongly) that the debt will be repaid, interest rates are low, and there is no crisis. In the bad equilibrium, lenders are doubtful (rightly or wrongly) that the debt will be repaid, interest rates are high, and there is a crisis. While you are in the good equilibrium, it looks like borrowing does not cause any problem. When you hit the bad equilibrium, people look back and ask how you could have been so stupid. A few years ago, I explained the challenge with predicting the trigger point for a crisis ahead of time.

The article suggests that emerging markets are more fragile because in those countries private companies often need to be propped up by government, and in a crisis credit dries up for both private and public borrowers. The implicit assumption is that developed countries are immune from such double whammies. I am not so sure.

The Distribution of Leisure

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John Cochrane writes,

a larger and larger fraction of the population, including many prime-age men, are not working and not actively looking for work. . .where does the money come from?

He refers to an article in the NYT showing that people who have abandoned the labor force spend a lot of time watching TV.

I have been predicting for quite a while that the distribution of leisure will be a major social issue going forward. The video of my most memorable portrayal, using a dance, seems to have been taken down by the Kauffman Foundation. Too bad you missed it. Anyway, the issue of the distribution of leisure is the flip side of the issue of the distribution of income.

Raj Chetty on Empiricism Without Theory

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The talk is here. Pointer from Tyler Cowen.

Broadly speaking, Chetty makes two points. One is that behavioral economics has inspired empirical analysis that can be useful for policy. The other is that we do not have to care about theory. Although theory might guide us to try certain empirical studies and might explain why a policy will work, all we need is the empiricism to know that a policy will work.

I found this view at best shallow and at worst not persuasive. Take one of his examples, in which a study guided by the theory of Loss Aversion found that classroom results improve more when incentives are framed in terms of what teachers will lose if results are bad than in terms of bonuses they will earn if results are good. My thoughts:

1. Given that the Null Hypothesis tends to be more robust than studies that purport to show significant effects from educational interventions, one ought to be pretty cautious about this.

2. A non-empirical a priorist of a Misesian bent, without knowing any behavioral economics, would recommend a market-provided school over a government-provided school. Among other advantages, the market will tend to punish poor performance, as markets tend to do. So in this example, without doing any empirical work at all, one can arrive at a recommendation that would be at least as effective as anything that Chetty might propose. While I am no Misesian, I do find the generic arguments against central planning more compelling than just about any empirical finding suggesting nudging opportunities.

3. I think that those who advocate behavioral economics would do well to also acknowledge behavioral politics. If Chetty understood how teachers unions operate where I live, he might be feel less a bit less excited about the opportunities for reform using his findings.

Related: Noah Smith on how the profession has been moving left.

Economics has become much more empirical, and that has made it much harder to wave away the possibility of market inefficiencies.

Pointer from Mark Thoma.

Health Care Policy 101

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Obviously, this NYT story deserved a lot of play.

“Harvard employees want access to everything,” said Dr. Barbara J. McNeil, the head of the health care policy department at Harvard Medical School and a member of the benefits committee. “They don’t want to be restricted in what institutions they can get care from.”

As individuals, Harvard employees are like everyone else. We all want unlimited access to medical services without having to pay for them. Of course, once somebody thinks about that for a a second, they realize that it is unworkable. You either have to limit access to services, or you have to make people pay for services so that they ration themselves. Obamacare tries to do some of both. When it tries to limit access, opponents scream “Death panels!” When it tries to make people pay for services, they scream, as some are quoted in the article “You’re putting a tax on the sick!” Among the latter screamers, I am sorry to say, is Jerry Green, a mathematical micro-theorist who goes back to the heyday of that stuff.

If I’m President of Harvard, I would say, “Fine. We’ll get rid of health insurance altogether if you don’t like it. Instead, we’ll give you that money in cash. Go out and buy your own health insurance. Stop complaining to us about the health insurance plan we provide.”

Which is one of many reasons I am not President of Harvard.

I Disagree with Juan Cole

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He writes,

Extremism thrives on other people’s extremism, and is inexorably defeated by tolerance.

Pointer from Tyler Cowen.

Is it uncharitable of me to point out that the Nazis were not inexorably defeated by tolerance?

One can make a case that extremism thrives on pusillanimity, moral ambiguity, and the inability to give neutrals and moderates a clear message that they will be safer if they line up with the good guys against the bad guys than if they try to stay in the middle.

On a more mundane level, I think that Juan Cole, and just about everyone else, would do better to frame arguments in terms of Type I and Type II errors. A type I error is failing to incarcerate or deport a dangerous individual. A type II error is incarcerating or deporting an innocent individual. (You may reverse the Type I and Type II terminology if you like.)

If you go all out to avoid Type I errors, then you commit more Type II errors, and vice-versa. It is important to keep that in mind. If you say “Close Gitmo now!” then some of the guys you release are going to commit atrocities. If you say “Deport dark-skinned immmigrants now!” then more than 90 percent of those you deport will be decent people and fewer than 0.001 percent will be terrorists.

All that said, I stand by my prediction that there is a good chance that we will see a rapid decline in militant Islam as a force this year.

Kevin Drum’s Crystal Ball vs. Mine

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He writes,

We’ll have useful AI by 2025 and full AI by 2045. This will either transform the world or destroy it. Flip a coin. However, regardless of how the end point turns out, the transition period is going to be pretty brutal for the 90 percent of the population that occupies the middle classes and below.

Pointer from Tyler Cowen. Remember, I wrote,

As for the issue of human obsolescence, I do think that we will see a trend toward more and more leisure. This will raise all sorts of questions of who deserves to have what provided for them. Right now, we say that people aged 67 or so deserve Social Security and Medicare. And people who can command only low wages (already obsolete in some sense?) deserve Medicaid and food stamps. And kids who can get in deserve the leisure aspects of college. My guess is that we will struggle quite a bit over the next forty years to adapt the social bargain concerning leisure.

Overall, there is a lot of similarity in our predictions. In particular, I agree with him that some of the long-predicted gains in medicine will finally come true.