Monthly Archives: July 2017

The state of the housing market(s)

Posted on by

About a month ago, the Harvard joint center for housing studies released a report. Lots of interesting stuff.

housing completions in the past 10 years totaled just 9.0 million units—more than 4.0 million units less than in the next-worst 10-year period going back to the late 1970s. Together with steady increases in demand, the low rate of new construction has kept the overall market tight, leaving the gross vacancy rate at its lowest point since 2000

Yes, Kevin Erdmann, you are right. We have really not built enough housing since 2007. Also, I don’t understand why I can’t make money investing in REITs. Rents are rising, interest rates are low, . . .

On average, 45 percent of renters across the nation’s metropolitan areas can afford the payments on a median-priced home in their market area, but the shares range from less than one in ten in the high-cost markets concentrated on the Pacific Coast as well as in Florida and the Northeast, to two-thirds or more in low-cost metros in the Midwest and rural South. In areas where homebuying is well out of reach for a large majority of renters, there is much less potential for increases in homeownership.

This is a fascinating divergence. The ratio of rent to price is comparable to an interest rate. Having vastly different rent-price ratios across regions is sort of like having vastly different interest rates across regions, except that there is no way to arbitrage against it.

Polarized attitudes about college

Posted on by

Inside Higher Ed reports,

Two years ago, 54 percent of Republicans said colleges had a positive impact on the country’s direction, with 37 percent rating higher education negatively…The latest version of the survey, conducted last month among 2,504 adults, for the first time found a majority (58 percent) of Republicans saying colleges have a negative effect, compared to 36 percent saying they have a positive effect.

The story is interesting throughout. It is based on an annual Pew survey.

I tell friends that if I had an 18-year-old child today, I would be tempted to try home schooling for college. Just go with YouTube and avoid the indoctrination centers.

As a check on myself, I regularly ask college students and very recent graduates if things are as bad as they are portrayed in conservative media. The modal answer is that indeed the faculty and a minority of students are very far left and very obnoxious about it, but if you are conservative or moderate you can work around the radical leftists.

My sense is that the people in charge of those institutions are past the point of caring what Republicans or conservatives think of them. Students are still clamoring to get in, so why change?

Looting the state governments

Posted on by

The Mercatus center ranks the fiscal condition of the fifty states.

The worst, at number 50, is New Jersey, followed (preceded?) by Illinois, Massachusetts, Kentucky, and Maryland. California is 43, and New York is 39. So by my count 4 of the bottom 5 states and 6 of the bottom 12 are known for powerful public-sector unions. I see that as a likely cause of fiscal weakness in those states, and I doubt that those six will climb out of trouble.

Deirdre McCloskey’s manifesto

Posted on by

Pointer from Donald Boudreaux. The first thing in her manifesto that caught my eye was this:

As [David] Boaz says at the outset of The Libertarian Mind, “In a sense, there have always been but two political philosophies: liberty and power.”

Ah, yes, the liberty-coercion axis.

In specific terms, McCloskey writes,

Cut the multiple levels of corrupt government in Illinois. Kill off, as the much-maligned Liberal 1.0 and billionaire Charles Koch wishes, the vast programs of corporate welfare, federal and state and local. Close the agricultural programs, which allow rich farmers to farm the government instead of the land. Sell off “public” assets such as roads and bridges and street parking, which in an age of electronic transponders can be better priced by private enterprise. Close the American empire. Welcome immigrants. Abandon the War on Drugs. Give up eminent domain and civil forfeiture and military tanks for police departments. Implement the notion of Catholic social teaching of “subsidiarity,” placing modest responsibilities such as trash collection or fire protection down at the lowest level of government that can handle them properly. Then outsource the trash collection and the fire protection. To finance K-12 education—socially desirable but sometimes out of reach of the poor—give families vouchers to cash in at private schools, such as Sweden has done since the 1990s and as Orleans parish has done for poor families since 2008. To achieve universal K-12 education, and a select few of other noble and otherwise privately unfundable purposes, such as a war of survival, by all means tax you and me, not only the man behind the tree. But eliminate the inquisitorial income tax, replacing it with a tax on personal consumption declared on a one-page form, as economists such as Robert Hall and Arthur Laffer propose. Still better, use only an equally simple purchase tax on businesses, to reduce the present depth of personal inquisition. Eliminate the so-called “corporate” income tax, because it is double taxation and because economists have in fact little idea which people actually end up paying it. (The old bumper sticker saying “Tax corporations, not people,” when you think about it, doesn’t make a lot of sense.) Give a poor person cash in emergencies, from those modest taxes on you and me. Quit inquiring into whether she spends it on booze or her children’s clothing. Leave her and her family alone. No pushing around.

Bobos and their children

Posted on by

David Brooks writes,

The educated class has built an ever more intricate net to cradle us in and ease everyone else out. It’s not really the prices that ensure 80 percent of your co-shoppers at Whole Foods are, comfortingly, also college grads; it’s the cultural codes.

Status rules are partly about collusion, about attracting educated people to your circle, tightening the bonds between you and erecting shields against everybody else. We in the educated class have created barriers to mobility that are more devastating for being invisible. The rest of America can’t name them, can’t understand them. They just know they’re there.

And part of the cultural code is Progressivism.

Timothy Taylor writes,

In a society with a high degree of social and economic mobility, grandparents should not have much or any effect on the social and economic position that children attain as adults. Thus, on average you should expect your five grandchildren to be evenly distributed across the socioeconomic spectrum. More specifically, if the levels of income are ranked and then divided into five groups with equal numbers of people, or quintiles, or educational attainment is divided up into five quintiles, you should expect that one of your five grand children will end up in each of the five quintiles–from top to bottom.

Some grandparents in America would be delighted beyond words if they had a reasonable expectation of this outcome: that is, they would be thrilled if three of their five grandchildren were in the middle quintile or above. Other grandparents in America would be appalled by this outcome: that is, they would be dismayed and even horrified if three of their five grandchildren were in the middle quintile or below.

The upper-class Americans that Brooks labeled the Bobos behave as if they would be appalled to see their children or grandchildren experienced relative downward mobility.

An interesting question will be how well the Bobo signals correlate with skills going forward. As long as the correlation is high, the status equilibrium may be robust. If the correlation is low, then the status equilibrium may be more fragile.

Peter Turchin on mathematical modeling

Posted on by

He writes,

Models clarify the logic of hypotheses, ensure that predictions indeed follow from the premises, open our eyes to counterintuitive possibilities, suggest how predictions could be tested, and enable accumulation of knowledge. The advantage of clarity that mathematical models offer scientists is nicely illustrated in the following quote from Economics Rules: “We still have endless debates today about what Karl Marx, John Maynard Keynes, or Joseph Schumpeter really meant. … By contrast, no ink has ever been spilled over what Paul Samuelson, Joe Stiglitz, or Ken Arrow had in mind when they developed the theories that won them their Nobel.” The difference? The first three formulated their theories largely in verbal form, while the latter three developed mathematical models.

Pointer from Mark Thoma.

Are you kidding me? The meaning of Arrow’s Impossibility Theorem has been endlessly debated.

With mathematical models in economics, the question is whether the conclusions of the model apply in the real world. That is something that cannot be settled mathematically. It often cannot be settled empirically.

If I had chosen to write a review of Turchin’s latest book, Ages of Discord, I would have devoted most of the review to criticism of Turchin’s statistical methods. I am quite confident that if you formulated his project as “Come up with a set of indicators that represent the concepts here,” there would be no consensus, and that almost no one would come up with the indicators that he selected. The overall thesis of the book might turn out to be right. But in terms of methods, it could be held up as the poster child of what Paul Romer calls “mathiness.”

Four Forces Watch

Posted on by

Richard Reeves says,

What’s been driving the kind of economic separation has been a combination of two main factors: One, well-established earnings inequality and higher returns to higher education at the top. And then actually you see this stunningly unromantic term, assortative mating — i.e. college graduates marrying other college graduates, which means they double down on that income. And then they’re able to put that into housing which gets them access to a good school and so on. Then you take all the tax subsidies that are available. So, I’ve got a new paper on 529 but there’s also mortgage interest deduction which ends up in a way subsidizing this kind of separation.

He is explaining the increased separation between the top 5th and the rest of the population in terms of income.

There is an interesting discussion of the notion that in order to have upward mobility you have to have downward mobility. Actually, that is not necessarily the case. Suppose that the bottom of the income distribution is populated largely by young workers and immigrants. As they move up the ladder, instead of replacing them with once-rich families on the way down, you replace them with a new generation of young workers and with new immigrants. This is not merely hypothetical.

Medicaid and Uncompensated Treatment

Posted on by

Joshua D. Gottlieb and Mark Shepard write,

many of the benefits of Medicaid go to medical providers who would otherwise provide uncompensated or unpaid care to the same people. In the absence of insurance coverage, hospitals still provide emergency care and lots of providers get stuck with unpaid debt, which ultimately amounts to free care. The ability to declare bankruptcy can serve as an implicit form of high-deductible insurance. Since third parties absorb some of the costs of medical care for the uninsured, people without insurance face diminished economic risk from adverse health shocks. A recent study finds that the cost of uncompensated care roughly accounts for the shortfall of enrollee value for Medicaid below program costs.

Pointer from Alex Tabarrok. My comments:

1. There are links in the paragraph to papers that document the claims that the authors make. I have not read those papers thoroughly, so I may be off base in some of the rest of my comments.

2. My understanding is that giving poor people health insurance does not do very much to reduce their use of the emergency room as their primary care source. Reducing emergency room visits was the hope of Romneycare (arguably a model for Obamacare), and it was not realized.

3. Uncompensated care is an alternative to Medicaid as a subsidy for poor people. However, I doubt that the authors are correct to imply that Medicaid is a transfer to health care providers. My guess is that health care providers, especially hospitals, shift the cost of uncompensated care to other patients. Note that the marginal cost of hospital treatment tends to be low relative to overhead cost, so that the prices charged to paying patients are always a huge markup over marginal cost (e.g., the $16 charge for a small carton of ordinary orange juice).

4. If I am correct about cost shifting, then increasing the share of poor people with insurance should enable hospitals to hold down prices. I doubt that we have seen much of an effect like this.

5. I have thought that uncompensated care is a relatively small part of overhead expense at most hospitals. But perhaps if I were on top of the literature my thinking would be different.

6. An alternative to Medicaid would be to have the government provide substantial funding to charitable organizations that provide health care to poor people. Perhaps if there were many charitable organizations in competition with one another, the best of them might find ways to get health care providers and their patients to utilize treatment more efficiently.

The CBO gets worse

Posted on by

John Taylor writes,

The second CBO procedural change was to discontinue the use of the “alternative fiscal scenario” in the long-term projections

There is more at the link.

I think that CBO modeling is way over-rated and biased toward interventionist policies. I would take them out of the modeling business almost entirely.

For budget projections, you need to do modeling. Budget projections are numbers, after all.

But models are subject to all sorts of errors. GDP growth could turn out to be higher or lower than expected. Interest rates could be higher or lower than expected. Your estimates of the cost of programs could be off, because people may respond to incentives differently than what you expect. Laws may change.

Given these sources of error, scenario analysis is a must. The CBO should be doing more scenario analysis, not less. I am increasingly convinced that the CBO as it currently operates is performing a huge disservice to public policy. Congress should make major reforms to the mission and operations of the CBO.

Elasticity of economic beliefs

Posted on by

Bryan Caplan writes,

If you’re even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment. If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment. The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

Links omitted. Read the whole post. My thoughts:

1. In my long essay, which is worth re-reading, I write,

it is politically consistent for someone on the left to believe that a rise in the minimum wage would not reduce hiring and also that more immigration would not depress wages. Analytically, however, these are opposite views. The minimum-wage increase will not reduce hiring if one treats labor demand as highly inelastic (so that a small change in hiring will be associated with a given change in wages). Increased immigration will not depress wages if one treats labor demand as highly elastic (so that a large change in hiring will be associated with a given change in wages). I think we are already starting to see economists opt for political consistency at the expense of analytical consistency.

2. On the point about downward rigidity of nominal wages as essential for unemployment, that has long been controversial. The mainstream view, particularly in textbooks, is that downward wage rigidity is important. But often it is difficult in the data to find the movements in real wages that would one expect to be associated with fluctuations in employment. And some Keynesians (including Keynes himself) have claimed that rapid wage reductions in a time of high unemployment would not reduce unemployment.

I do not wish to revisit the Keynesian macro controversy here. My main point is that economists are willing to take analytically inconsistent positions in order to remain politically consistent. Bryan wants to call them on it, but I think that the trend is against him.