Monthly Archives: June 2017

Racism a Century Ago

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A commenter provides supporting evidence for my view that it was worse back then. He cites three articles from the North American Review. For example, one of them says,

The original population of the States, it is true, was mixed. But there was nothing unassimilable in the Dutchman, the Frenchman or the Swede. Irish immigration frightened Americans into Know-nothingism. But about the worst that it did, after all, was to fill the ranks of Tammany. It has found its level and is a source of alarm no more. Not so the Italian, with his Mafia, or the Eussian and Polish exile. The spirit of European revolution and of European anarchism is invading American cities.

Read the whole comment.

Google and Bell Labs

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A commenter writes,

What Google et al are doing is a lot like the Bell Labs of old. Just as AT&T’s monopoly profits paid for a lot of research of uncertain short term direct value to Ma Bell, the Internet bigs have poured a lot of money into side projects that may not actually be profitable, but the core business prints so much money that investors aren’t inclined to ask too many questions.

In hindsight, we owe a lot to Bell Labs and Xerox PARC. Maybe in twenty years the effect of research projects at Google and Amazon will be just as significant.

The decline of GDP

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Shane Greenstein writes,

Television has gotten much better over the last few decades, but—for many reasons—total advertising has not grown.

Without more advertising revenue, the contribution of better TV to GDP is zero. A few remarks:

For me personally, the value of television is close to zero. I never turn on the TV. Still, if I did have to watch, I would find prefer new shows to the type of shows that were available when I was a kid.

But Greenstein’s larger point is that free services, like Google Maps, do not get valued properly in GDP.

I would like to make the point larger still. The economy is much less legible today than it was in 1950. The most legible components of the economy are agriculture and manufacturing. In 1950, the majority of people worked in those sectors. Today, if you add up farm labor and manufacturing production workers (not including white collar workers in manufacturing), you get maybe 7 percent of the labor force. Pretty much everyone else works in sectors like finance, government, health care, and education, where we do not know how to measure or value output.

The Department of Commerce hums along, producing a number for GDP. And many economists read a lot into the behavior of this number. In the process, they treat an increasingly illegible economy as if it were still legible.

Now vs. Then

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I have resisted two claims made in recent conversations.

1. Compared with the early Irish, Italian, and Eastern European immigrants, Hispanics today face more prejudice.

I am afraid that the Irish, Italian, and Eastern European immigrants faced a great deal of prejudice, and that this has been mostly forgotten. Thomas Leonard’s Illiberal Reformers is a must-read for its coverage of the eugenics movement. My reading of that book makes me suspect that the prejudice back then was even worse.

2. Compared with the 1960s, the stability of our country is less threatened in the Trump era.

This is a tough one, because it involves assigning probabilities to non-stochastic phenomena. Even if the probability of chaos is in some sense lower today than it was in 1965, it is still higher than zero today, and meanwhile we know that the country stabilized after the 1965-1980 period receded. So in some sense, it is simple to claim that we live in more dangerous times now.

I am prepared to argue that we survived the 1960s because politics was still coalitional and fluid rather than being entirely identity-driven. The Democratic Party absorbed the anti-war movement, even though the Vietnam war was initiated by a Democratic Administration. The Republican Party absorbed what had previously been the core constituency of the Democrats, the Solid South.

In 1967, blue-collar workers and college students were like two distinct tribes. But by 1973, blue-collar workers were sporting long hair, listening to hard rock, and experimenting with drugs and sexual freedom. I would be willing to bet that in 2023 we won’t see erstwhile Trump supporters adopting the race and gender doctrines that are prominent on campus today.

I’m not seeing the sort of coalitional politics that I saw in my youth. Mr. Trump won by gaining votes from among the anti-Bobos. The Democrats are doing remarkably little to try to get those votes back. Indeed the Bobos who form their base do not want the anti-Bobos in their coalition.

Because today’s divide seems less fluid to me, I think that the danger is higher that conflicts will not be reconciled peacefully.

Landlords and Speculators, Again

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Some good comments on the earlier post, better than it deserved.

I regret writing that mortgage lenders and owners are on the opposite end of a transaction. It is more apt to say, as Kevin Erdmann pointed out, that the house is financed with debt and equity. Both can earn a return.

Another commenter offered a numerical example. Let me riff off some of the numbers.

Suppose the house costs $200,000, it is 100 percent financed, and the mortgage rate is 4.0 percent. Then you can think of the interest expense as $8000. Pretend that it is the same for the owner-occupant as it would be for a landlord. Both the owner-occupant and the landlord can deduct the interest expense for tax purposes. They also can both deduct property taxes. I think that 3 percent is high, so I would go with something like 1.5 percent, or $3000.

If depreciation is 2 percent per year, it amounts to $4000, which is what the commenter suggested for repairs. Depreciation is tax deductible for the landlord but not for the owner-occupant. The commenter suggests that insurance is $1200, which again the landlord could deduct as an expense. If the landlord pays for utilities, then the landlord can deduct those as an expense. That might be another $2400 in deductions. Condo fees or Homeowners’ Association fees, if any, would work similarly.

If the price/rent ratio is 10, then annual rent is $20,000. If the price/rent ratio is 20 (high by historical standards), then the annual rent is $10,000. In any case, that is income to the landlord, who has to pay taxes on it. So overall, the owner comes out ahead.

Erdmann offers an interesting take on cities where supply is clearly constrained by regulation.

political obstacles to the allocation of capital into new residential housing has caused market prices to be wholly unmoored from replacement cost in those cities. In those cities, buying a house is like buying a taxi medallion. It is not so much a claim on shelter as it is a claim on political exclusion.

His point is the return on investing in housing would be more predictable, and much of the speculative aspect of home purchase would go away, if house prices were more closely tied to construction costs. And they would be more closely tied to construction costs if development were less constrained by regulatory restrictions.

College, Critical Thinking, and the Null Hypothesis

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According to a WSJ story, as described by Newsweek,

The Journal found that at about half of schools, large groups of seniors scored at basic or below-basic levels. According to a rubric, that means they can generally read documents and communicate to readers but can’t make a cohesive argument or interpret evidence.

The WSJ story itself says that

At some of the most prestigious flagship universities, test results indicate the average graduate shows little or no improvement in critical thinking over four years.

Sounds like another win for the null hypothesis.

Yuval Levin on the CBO

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He writes,

Rather than produce stark hard-number projections behind a heavy veil, the CBO and JCT could act more as developers and stewards of an open public model, available online to anyone with sufficient technical prowess to use it. The two agencies, with outside help, would create and maintain the model, and would decide on a set of official economic assumptions and policy expectations to be used in modeling for formal budget-process purposes. Anyone could “score” any policy proposal using those official assumptions and could also use the model with other assumptions to project a proposal’s consequences under alternative circumstances.

I do not think that any fix of the Congressional Budget Office or Joint Committee on Taxation gets at the problem.

Alan Blinder once pointed out what he called Murphy’s Law of economic policy. That is when economists agree on something and are confident about it, nobody listens. But when economists are engaged in speculation and biased argument, they get attention.

When it comes to “scoring” health bills for their effect on the proportion of the population with health insurance, the CBO is engaged in speculation, and Levin points out a form of bias.

It is by this point basically a quirk of the CBO model that it judges the mandate to be exceedingly effective — far more effective than the evidence of the past few years would suggest.

If your model tells you that a lot of people purchased health insurance because of the mandate, then it will predict that a lot of people will decline health insurance without it. And, of course, the press will report this as people “losing” their health insurance.

On the other hand, when the CBO puts out its reasonable forecasts that entitlement spending is not sustainable, pundits tell us not to take those seriously. But as far as I can tell, those forecasts are still on track.

The Class War Synthesis

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Many of us have talked about the Trump-era class war. You can call it Somewheres vs. Anywheres. Bobos vs. anti-Bobos. Managerial elites vs. populists. But both sides need one another, or at least they are stuck with one another. This suggests that some sort of Hegelian synthesis is likely to emerge. What it will look like?

My first thought is national socialism. It needs another name, because of all the Hitler/holocaust baggage, but here is why it makes sense.

The nationalism would include immigration restrictions, protection of “culturally significant industry” (e.g., wine in France), and cultural pride. This would appeal to the anti-Bobos. The socialism part, which requires technocratic management of economic outcomes, would appeal to the Bobos.

To get to national socialism in the U.S., the left would have to give up its attachment to multiculturalism and the right would have to give up its attachment to free markets (which Alberto Mingardi says has happened). Right now, it is easier for me to imagine the latter than the former, but maybe if the left loses one more election that could change.

And no, I do not want to see national socialism, even without the baggage. But it strikes me as a very plausible scenario.

Jacob Siegel writes,

A politics that’s inclusive, multi-ethnic, pluralist, federalist, preserves universal healthcare, preserves the liberty of individuals and their right to make their own choices without trying to legislate cultural attitudes, that defends civil liberties, demands equality of opportunity, curbs and regulates speculative finance, recognizes that markets are not value neutral or sacrosanct and encourages economic policy to improve the material well being of Americans without returning to reactionary nativism or neo-mercantilism, that ends wars that can’t be won and doesn’t start new ones without a clear threat or national interest that can be expressed in terms of political outcomes and for which people above the rank of sergeant will be held accountable

Parts of his essay remind me of Martin Gurri, in their description of the mood of revolt and nihilism that is in the air. His preferred solution strikes me as the left giving up the most Inquisition-ist form of multiculturalism but otherwise getting its way. My guess is that we will see something worse.

Landlords as Speculators

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Adam Ozimek writes,

I wonder what housing investment skeptics [sic] Robert Shiller thinks of people who make their livings as landlords. How does this irrational, money losing market exist? After all, if you can’t make a profit by buying a home and renting it to yourself, how is a landlord supposed to?

Pointer from Tyler Cowen.

It is useful to think of owning a house as going into business as a landlord, with you and your family as tenants. I read Ozimek as encouraging us to think along such lines, which makes sense to me. Some further thoughts:

1. As your own landlord, you do not pay income taxes on the rent from your tenants. By the same token, you do not get to deduct as many expenses from your income.

2. As your own landlord, you might have an exorbitant amount of your wealth tied up in your rental property. You can choose less leverage and more diversification by investing instead in the stock market. Ozimek makes it sound like it’s a good thing that you can invest so heavily in housing with so little money down, but leverage multiplies losses as well as gains.

3. Mortgage lenders/investors tend to make a profit, and they are on the opposite side of the transaction as the home buyer. It is unlikely that being on one side is always better than being on the other.

4. My guess is that the landlords who make a profit are smart/lucky speculators. That is, they buy low and sell high. Just buying a random property at a random time and renting it out is less likely to be profitable.

5. As a household, you choose when to buy and sell based on many considerations other than timing the market. A landlord makes the decision solely based on trying to time the market. In the terminology of financial economics, the landlord is a “news trader” and the home buyer is a “noise trader.” On average, news traders tend to profit at the expense of noise traders.

The bottom line is that, yes, you should think like a landlord when you decide about buying a home. And a successful landlord is one with skill and/or luck at choosing when to buy and when to sell. Robert Shiller has a lot of evidence for mean reversion in the ratio of price-to-rent in the housing market. But he does not make his living as a housing speculator. Landlords do.