Monthly Archives: September 2015

The Causes of Mortgage Defaults

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The latest paper is by Fernando Ferriera and Joseph Gyourko. This article about the paper says,

Ferreira’s data show that even with strict limits on borrowing—say, requiring every borrower to put 20% down in all circumstances—wouldn’t have prevented the worst of the foreclosure crisis. “It’s really hard for certain regulations to stop the process [of a bubble forming],” Ferreira says. “I really wish my research had showed that it’s all about putting down 20% and all problems are solved, but the reality is more complicated than that.”

This analysis has both good points and bad points. The good point is that it goes against the “predatory lending” narrative. As a home buyer, you were better off with a predatory loan in 2002 (when prices were still headed higher) than with a prime loan in 2006 (when prices were near the peak). The bad point is the implication that there was nothing wrong with loans with low down payments. In fact, it was those loans that allowed speculation to get out of control.

Scott Sumner thinks that the finding that many of the mortgage defaulters were “prime” borrowers is enough to confirm that mortgage defaults were caused by a slowdown in nominal GDP growth. But mortgage defaults do not come from a lack of nominal GDP growth. They come from negative equity among mortgage borrowers.* And that comes from house prices falling, for which the main cause was the rapid rise in the first place. And both the rise in prices and the subsequent wave of defaults were much exacerbated by the fact that so many borrowers, “prime” or otherwise, had so little equity to begin with.

From part of the NBER coverage of the paper that Sumner does not quote:

The authors’ key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas.

Let’s assume that we can agree that the big drop in house prices caused the wave of mortgage defaults. Three possibilities:

1. The drop in house prices was a purely exogenous shock.

2. The drop in house prices was due to the slowdown in nominal GDP growth.

3. The drop in house prices was due to the internal dynamics of a housing market that had become saturated with speculative buying with little or no money down.

The stories about the study make it sound like it was (1). Sumner believes (2). I vote for (3).

Adamantly.

UPDATE: See Megan McArdle for a similar point of view.

De-materialization Watch

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Linus Blomqvist, Ted Nordhaus, and Michael Shellenberger write,

Slowing population growth, demand saturation in developed countries, and improved technological efficiencies have all contributed to what is known as decoupling. Relative decoupling refers to impacts growing at a slower rate than population or consumption. Absolute decoupling means impacts are declining in absolute terms. The per-capita farmland requirement (cropland and pasture) has declined by half in the last half-century. In absolute terms, cropland has expanded 13% and pasture 9% in that time period, but the sum of the two has remained stable since the mid-1990s. Global consumption of wood has plateaued, contributing to a slight decline in the area of production forest since 1990. While overharvesting of wild animals for meat has increased in the tropics, most developed countries have decoupled from this form of impact. The world has almost entirely decoupled from whaling. Total water consumption increased by 170% between 1950 and 1995, but per-capita water consumption peaked around 1980 and declined thereafter. The least decoupled environmental impact is greenhouse gas emissions from energy: global per-capita emissions increased by nearly 40% between 1965 and 2013.

Pointer from Justin Fox, who adds insightful commentary. Via Mark Thoma.

There seems to be a lot of similar environmental commentary out this year. Ron Bailey’s new book, Jesse Ausubel’s paper, and now this (which credits Ausubel).

I recommend the entire paper. I think it would be accessible to students in freshman economics courses, and I really believe that if freshman economics ignores this topic, that means that the primitivists will be unopposed on college campuses.

Evidence for Sticky Wages?

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The WSJ reports,

Scant availability of skilled construction workers has hampered home construction at various times in the past few years of recovery. But the shortfall seems to have grown more acute of late, as new-home sales are up 21.2% so far this year from the same period last year and commercial construction has increased steadily.

This is an interesting phenomenon for several reasons. First, what happened to all of the construction workers that were laid off after the housing bust? Second, what is happening to wages in the construction industry?

In particular, why have wages not risen to a point where the market clears? Or have they in fact risen, and the phrase “scant availability” of workers means “scant availability at the wage that we would prefer to pay,” which is below the market-clearing wage.

Three Axes of Refugees

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The crisis du jour is once again aligning people along the three-axis model. The freedom-coercion axis says that borders should be open. The oppressor-oppressed axis says that people fleeing Syria are oppressed, and anyone who would keep them out is evil. The civilization-barbarism axis says that European countries that take in large numbers of refugees are committing cultural suicide. Just one of many examples in this genre:

Few intend or desire to adapt to European society. They may want to ride Europe’s gravy train, but by and large they feel contempt for its values. Many scorn Christians and Jews. They reject freedom of speech and religion. Most openly subjugate women and think that homosexuals should perish. Yet to hear Europe’s political class talk, accepting these newcomers and many more like them constitutes a moral test for liberal and Christian principles.

The author goes on to cite Gibbon on how Rome succumbed to barbarians.

My guess is that:

1. Most of those who support allowing more migration from the Middle East live in affluent neighborhoods.

2. Wherever the migrants from the Middle East end up, it will not be in affluent neighborhoods.

Libertarians should not be so quick to align with progressives on this issue. Be as suspicious about government involvement in “solving” the crisis as you are about government’s role in enforcing borders.

Imagine the decisions about taking in Middle Easterners being made by individuals, rather than by government. That is, imagine that it were up to individual households to take them in.

Or imagine that refugee resettlement had to be funded entirely through private donations. What if the political leaders doing their moral posturing on behalf of refugees had no access to taxpayer money. Instead, suppose that they had to contribute their own money or money that they raised through private charity.

Dani Rodrik on the Economics Profession

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He writes,

The social world differs from the physical world because it is man-made and hence almost infinitely malleable. So, unlike the natural sciences, economics advances scientifically not by replacing old models with better ones, but by expanding its library of models, with each shedding light on a different social contingency.

Pointer from Mark Thoma.

This is certainly closer to my position than the “I am a scientist and the other guy isn’t” rhetoric coming from other quarters.

Cheaper than Seasteading

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Ofer Petersburg reports,

The price: 450,000 euros. The goal: To build an Israeli colony on it. Officially, the island is known as Petäjäsaari, but already upon disembarking from the plane in the town of Kuopio, after a half hour flight from Helsinki, Finnish media report on “The Israeli Island,”

Four young Israeli entrepreneurs bought it. They seem to want to create an eco-friendly (i.e., primitive) quiet residential village. No, not really a substitute for seasteading.

Jonathan Haidt on Progressive Campus Culture

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Summarizing a paper by two sociologists, he writes,

The key idea is that the new moral culture of victimhood fosters “moral dependence” and an atrophying of the ability to handle small interpersonal matters on one’s own. At the same time that it weakens individuals, it creates a society of constant and intense moral conflict as people compete for status as victims or as defenders of victims.

The paper is by Bradley Campbell and Jason Manning.

To me, this just sounds like what I call the oppressor-oppressed axis in the three-axes model.* With college campuses dominated by progressives, you would expect them to see things in terms of oppressors and oppressed. But I am not sure that the rest of American culture is going to go this way.

*Well, I’ll be darned. They cite The Three Languages of Politics. They say, though, that non-progressives are starting to use oppressor-oppressed terminology. That may be true (as when one complains that academic life is prejudiced against conservatives), but ultimately I think you have to stick to a different axis to remain a conservative or libertarian.

The authors claim that what preceded our current culture was a culture of individual dignity. Haidt quotes the authors,

Members of a dignity culture, on the other hand, would see no shame in appealing to third parties, but they would not approve of such appeals for minor and merely verbal offenses. Instead they would likely counsel either confronting the offender directly to discuss the issue, or better yet, ignoring the remarks altogether.

Ron Bailey offers a succinct description of the earlier transition from an honor culture to a dignity culture.

In honor cultures, people (men) maintained their honor by responding to insults, slights, violations of rights by self-help violence. Generally honor cultures exist where the rule of law is weak. In honor cultures, people protected themselves, their families, and property through having a reputation for swift violence. During the 19th century, most Western societies began the moral transition toward dignity cultures in which all citizens were legally endowed with equal rights. In such societies, persons, property, and rights are defended by recourse to third parties, usually courts, police, and so forth, that, if necessary, wield violence on their behalf. Dignity cultures practice tolerance and are much more peaceful than honor cultures.

The “honor culture” reminds me a bit of The Rule of the Clan and Mark Weiner’s view that it is the alternative to a strong state.

I would give the paper the Cowenian caveat: “speculative”

The Book of Arnold on the Economics Profession

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I am adding a new section, which includes the following:

In general, I shy away from using the term “social science,” because I do not think that economists can aspire to the same level of falsifiability as physicists. I believe that the difference between social science and natural science boils down to this:

In natural science, there are relatively many falsifiable propositions and relatively few attractive interpretive frameworks. In the social sciences, there are relatively many attractive interpretive frameworks and relatively few falsifiable propositions.

The reason that there are relatively few falsifiable propositions in the context of social phenomena is that there are many causal factors, and decisive experiments are rarely possible. Social phenomena are characterized by high causal density, to borrow a term from James Manzi.

As a result, economics is closer to history than to physics. If a historian wants to examine the causes of the decline of Rome, or the decline of empires in general, he or she will provide an interpretive framework. That framework cannot be falsified, but readers can compare it to other frameworks and make judgments about its plausibility.

For example, consider the phenomenon of the comparative salaries of men and women. Economists interpret salaries using the framework of human capital. That is, workers bring to the market different levels of ability, training, and experience, and this determines what they are able to earn. Sociologists use a framework that emphasizes group identity, status, and power, with men the more dominant group and women the more oppressed group.

If a study suggests that women earn less than men, even when controlling for years of education and other indicators of human capital, then this is anomalous for the economists. If a study suggests that most of the lowest-paying occupations are predominantly occupied by men, then this is anomalous for the sociologists. However, such observations will not prove decisive. By invoking other factors to explain anomalous results, each side can remain unmoved. Economists will not abandon their human capital framework, nor will sociologists abandon their group status framework.

. . .Economists who employ models think of themselves as “doing science,” meaning that they are generating falsifiable propositions. However, in practice, they rarely reject their preferred models. Instead, they explain away anomalous observations. In that sense, they are really using their preferred models as interpretive frameworks.

The Book of Arnold contains sections like this one, which argue in general terms against MIT economics. It also contains sections about practical issues, such as environmental sustainability and housing policy. The methodological sections are intended to mean something to Ph.D economists. The practical sections are intended to resonate with students and others who have much less economic background. It could be that there are diseconomies associated with trying to reach both audiences.

David Colander on the Economics Profession

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Timothy Taylor points to an interesting series of essays by Colander. Self-recommending*. I was drawn to the one on Harvard-MIT incest.

What I’m saying is that modern mainstream economists seem to lack the all-round wisdom reflective of the great policy integrators of the past, such as Bob Solow, Charlie Kindleberger, Charles Goodhart, Paul Samuelson, Art Okun, Jim Tobin, Herb Stein, and Paul Streeten, to name just a few.

I agree that there is a generation gap. More recent generations take their own work much too seriously. I think that economists offer interpretations of reality, and alternative interpretations often have as much validity. I think that the older economists understood this, even if they did not explicitly articulate it. Subsequent generations lost this wisdom.

He goes on,

Modern mainstream economics is a bit off as a result of too much inbreeding. Specifically, my argument is that the gene pool of economists in the replicator dynamics of the profession is too small to prevent undesirable recessive traits from showing up in mainstream economists from time to time.

Recall that I describe Stan Fischer as the Genghis Khan of macroeconomics, because essentially every macroeconomist is descended from him.

*self-recommending is a Tyler Cowen term, which I recall he defined as a project that by virtue of the topic and author is likely to be worth reading.

The Basic Social Rule

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My latest essay:

I claim here that humans have a fundamental rule of social morality, which is: Reward cooperators; punish defectors. The use of this rule is what enables humans to work effectively with strangers, making possible sophisticated economies and civilizations. However, this rule can cause problems when people mis-classify the social actions of others.

Please read the whole thing and comment. These are ideas that I also plan to include in the Book of Arnold.