Monthly Archives: October 2016

Timothy Taylor on Home Ownership Trends

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He writes,

Notice that homeownship rates tend to be much lower in large cities: indeed, if a homeownership rate below 50% seems implausible to you, you might reflect on the fact that this is already a reality in US cities. Notice also that homeownership rates in the Northeast and West regions are already below 60% (of course, this is in substantial part because there are more large cities in these regions). Thus, one’s belief about the future of homeownership is in some ways a statement about where people choose to live in the future.

In my view, the main drawback to renting (government distortions aside) is that you have to negotiate with the owner concerning maintenance and renovations. Perhaps somebody should work on contracts that address this.

As of now, one party (typically the landlord) must bear all of the costs, but maintenance and renovation is only done at the landlord’s discretion. One can imagine a different arrangement that allows the tenant to have discretion, but with incentive to protect the landlord’s interest.

For example, the cost of basic maintenance, such as fixing the HVAC system when there is a problem, could be split 80-20 between the landlord and the tenant. Because the tenant has skin in the game, the tenant gets to be in charge of getting the system fixed.

On the other hand, the cost of renovation, such as a kitchen remodeling, might be split closer to 50-50. Again, the tenant is in charge. The tenant pays a higher share than in the case of basic maintenance, because the renovation might prove less valuable to a subsequent tenant.

Another contractual possibility would be to address the state of the dwelling when the tenant leaves. In principle, the landlord could be compensated by the tenant for damage (that is what security deposits do, up to a point), and the tenant could be compensated by the landlord for increases in property value due to upgrades paid for by the tenant.

What Socialism Looks Like in America

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New York state legislature effectively bans airbnb. It does so by imposing a $7500 fine on anyone who so much as advertises a short-term rental.

“The bill says: You can’t advertise an illegal activity,’” Assemblywoman Deborah Glick, a Manhattan Democrat who supported the bill, told the Wall Street Journal in June. “I don’t know what the big confusion is.”

Actually, those of us who favor free speech probably should argue that you should be able to advertise to sell heroin or any other illegal good or service. Prosecution should take place for the sale, not for the advertisement.

My larger point is that people who favor socialism here seem to think that it will somehow turn out to be pristine and un-corrupt. Instead, as Milton Friedman pointed out, the attempt to regulate markets eventually undermines every other form of freedom.

Doug Elmendorf on the Debt

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He writes,

Together with Brookings Senior Fellow Louise Sheiner, I have analyzed alternative explanations for low Treasury rates and the implications of each for budget policy (Elmendorf and Sheiner, 2016). We found that most explanations imply that the country should have a higher debt-to-GDP ratio than otherwise. We find that most explanations also imply that federal investment should be higher than otherwise, and I will come back to that later. The intuition for these results is that interest rates show the direct cost to the Treasury of its borrowing and provide information about the indirect cost to the economy of Treasury borrowing—and if costs will be persistently much lower than we are accustomed to, then more borrowing, especially for investment, passes a cost-benefit test.

Pointer from Tyler Cowen.

Of course, one possible explanation for low interest rates is that growth prospects are poor. Another possible explanation is that we are in a bond bubble. If either of those turns out to be the case, then we are going to wish that we had less debt to contend with.

Creeping Socialism in Health Insurance

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Jeffrey H. Anderson writes,

According to the Centers for Disease Control and Prevention (see table 1.2b), 66.8 percent of those living in the United States had private health insurance in 2007. Now, as of 2015 (the most recent year for which figures are available), only 65.6 percent of those living in the United States have private health insurance.

…Meanwhile, the CDC figures show that the percentage of people living in the United States who have public health coverage has risen dramatically, from 18.1 percent in 2007 to 25.3 percent in 2015 (see table 1.2a).

I was wondering how much of this reflects people aging into Medicare, but then I clicked on the link to the report and the tables are for Americans under 65. My guess is that future health care reforms (“fixing Obamacare”) will move us further in that direction.

How Fractal is High-skilled Immigration?

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Sari Pekkala Kerr, William Kerr, Çaǧlar Özden, and Christopher Parsons write,

The number of migrants with a tertiary degree rose nearly 130 percent from 1990 to 2010, while low skilled (primary educated) migrants increased by only 40 percent during that time. A pattern is emerging in which these high-skilled migrants are departing from a broader range of countries and heading to a narrower range of countries—in particular, the United States, the United Kingdom, Canada, and Australia.

Pointer from Tyler Cowen.

I wonder if this pattern is fractal. That is, within the United States, do we see a net influx of high-skilled individuals to only a few metro areas? Within metro areas, do we see a net influx to only a few hot spots?

Sebastian Mallaby Interview

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with Greg Ip of the WSJ.

The way that Greenspan protected and established the independence, authority and prestige of the central bank was by being more political than the politicians who criticized him. If they wanted to leak bad stories about him, he would leak three bad stories about them. If they wanted to try and entrap him in politics, you know what? He had contacts in the Senate. He would go over there and so and so, who was his enemy, suddenly would not get confirmed to a big administration position. So he knew the dark arts of politics better even than the politicians did.

…This model of the empowered expert, the political guru, is now in retreat in the era of Donald Trump, but it isn’t totally gone. I would say that’s the central legacy that Alan Greenspan has left to the United States.

Read the whole interview.

The Case for Manners

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Henry Hazlitt wrote,

Too often moral codes, especially those still largely attached to religious roots, are ascetic and grim. Codes of manners, on the other hand, usually require us to be at least outwardly cheerful, agreeable, gracious, convivial—in short, a contagious source of cheer to others.

Pointer from Don Boudreaux.

I think that codes of manners also can be used to convey respect for others. You are telling people, including strangers, that you conduct yourself with them in mind.

I believe that restraint in the use of four-letter words used to serve this purpose, and it could once again serve this purpose. This puts me at odds with my fellow Baby Boomers and those who came after.

Greenspan and Financial Regulation

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In his new biography of Alan Greenspan, Sebastian Mallaby says some things I agree with, but he also rides a number of hobby horses that I take issue with.

Where I agree:

1. I agree that it is hard to achieve financial soundness through regulation. Financial markets are too flexible and adaptive to prevent institutions from gaming the system. If you want to see that point made at greater length, read my essay The Chess Game of Financial Regulation.

2. From 1970 to 1990, we got rid of interest rate ceilings on deposits, restrictions on bank branches, and futile attempts to distinguish commercial banking from investment banking. The process was long and grueling, with lobbyists engaged in furious rent-seeking battles all along the way. What Mallaby points out, and that I hadn’t considered, is that when the dust settled, we had a more rational, integrated competitive financial sector, but we had the same archaic, fragmented regulatory structure. So we had a separate regulator for thrifts, even though institutions with thrift charters were doing things that the thrift regulator had never seen before. The same with commercial banks, insurance companies, and investment banks. It was a regulatory structure that was set up to fail.

Where I disagree:

1. Mallaby buys into the theory that Brooksley Born should have gotten her way and had all derivatives trading moved to exchanges. I disagree. It is possible to trade derivative contracts in Treasury bonds and bills on exchanges, because the underlying securities are generic and liquid. Traders can benchmark prices and cheaply engage in arbitrage transactions. What AIG and others were doing involved creating a separate credit default swap for each security. In effect, Born would have been asking the exchanges to set up hundreds of different markets, most of which would have been illiquid in terms of the underlying securities.

If Greenspan was reluctant to wade in with financial regulatory proposals, that may have been because he thought that the issues were over his head. In fact, that may be what I most respect about Greenspan. Regulators generally do not see their own limitations. Brooksley Born would be a prime example of a regulator willing to take on a task while lacking sufficient knowledge.

2. Although I agree with Mallaby on the challenges of reining in financial excesses using regulation, he takes the view that monetary policy can and should be used to prick bubbles. He writes as if a major lesson, perhaps even the main lesson, of the financial crisis is that central banks should raise interest rates to pop bubbles. He writes as if this is obvious, when in fact very few economists see it that way, even now. In fact, Timothy Taylor recently pointed to an IMF study saying that global debt is at an all-time high, and only on the extreme right are there economists suggesting that monetary policy needs to be tightened. The other day, I got to attend a talk by Mallaby and I posed this issue. He agreed that his views were not widely shared by the mainstream (the people who complain about low interest rates as a threat to financial stability tend to be on the far right), but he said that one of the perks of writing the book was putting his opinions out there. Fair enough.

3. Mallaby blames the crisis in part on inflation targeting. He sees this policy as the mindless result of Fed officials’ not-entirely-rational preference for low, stable inflation. He could have pointed out that it was the overwhelming consensus of academic economists of the 1980s and 1990s that low, stable inflation was exactly the right objective for monetary policy. They believed that demand-driven recessions were the result of the public’s errors in expectations about inflation. Get rid of those errors by stabilizing inflation, so the thinking went, and you would eliminate recessions. This was known as the so-called Divine Coincidence, because it meant that the Fed could just focus on keeping the rate of inflation steady and let full employment take care of itself.

4. Mallaby takes a cheap shot at the Basel II approach to risk-based capital requirements, in which regulators were to use a bank’s model of its risks to gauge the amount of capital it should have. He compares this to giving a teenager the keys to the Mercedes. (a) I think that Greenspan had retired before Basel II was widely implemented. Most banks, perhaps even all banks, were still on Basel I, which used risk buckets. (b) Rather than being silly, using models was a good idea. The Basel I approach treated a bank that hedged its risks and a bank that went unhedged as identical. Basel I had no coherent way of dealing with derivatives or securities with embedded options, such as mortgage-backed securities. You need to use a model to solve both of those problems. And because every bank codes its portfolio differently, it is impractical to try to input the data into any model other than the one that the bank itself uses. Since you cannot try other models on the data, the best you can do is audit the way the bank goes about its modeling process.

It’s not a perfect way to regulate, but there is no obviously better way. At his talk, Mallaby emphasized that he did not think that any regulatory policy could truly rein in risk-taking. This gets back to point 1 under “Where I agree.”

Janet Yellen raises some good questions

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She said,

Prior to the financial crisis, these so-called representative-agent models were the dominant paradigm for analyzing many macroeconomic questions. However, a disaggregated approach seems needed to understand some key aspects of the Great Recession.. . .

More generally, studying the effects of household and firm heterogeneity might help us better account for the severity of the recession and the slow recovery.

Pointer from Mark Thoma.

You might have to go much farther than Yellen has in mind in thinking in terms of heterogeneity of firms, workers, and households. At some point, it ceases to be macro.

And there is this:

the influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis. Although inflation fell during the recession, the decline was quite modest given how high unemployment rose; likewise, wages and prices rose comparatively little as the labor market gradually recovered.

I disagree with the standard models of inflation, including the monetarist model. Specialization and Trade offers my answers to all of Ms. Yellen’s questions.