Tuesday, March 31, 2009
Friday, March 27, 2009
Thursday, March 26, 2009
I guess the story is: a bank owner thinks a pool of mortgages is worth $10 million, but owning those mortgages makes the bank excessively cautious, which somehow harms the wider economy. So the wider economy would like to see the mortgages sold to an institution whose caution would be less harmful, even if the less harmful institution valued the pool at just $5 million. But the bank owner refuses to sell for less than $10 million, so the bank owner keeps the pool and its caution.
Wednesday, March 25, 2009
"The Commerce Department says sales rose 4.7 percent in February to a seasonally adjusted annual rate of 337,000 from an upwardly revised January figure of 322,000."
"New orders for manufactured durable goods in February increased $5.5 billion or 3.4 percent to $165.6 billion, the U.S. Census Bureau announced today. This increase follows six consecutive monthly decreases, including a 7.3 percent January decrease. Excluding transportation, new orders increased 3.9 percent. Excluding defense, new orders increased 1.7 percent."
Edward Glaeser has effectively argued that, thanks to a housing “bubble,” we have too much housing and are better off by adjusting to that reality rather than introducing a subsidy or trying schemes to temporarily and artificially bolster housing demand. On these terms, it might seem that the cards-with-houses proposal is another attempt to avoid taking needed medicine.
However, the flip side of “too much housing” is too few people to live in the houses. From some perspectives, America has had, and continues to have, too few people. Skilled immigrants add much to our economy and society. They are often leaders, for example, in patenting and starting businesses. Yet we still severely restrict their entry into the United States.
A perennial concern is that our neighborhoods might not be able to absorb many immigrants without some turmoil. But these are not normal times. Many neighborhoods have homes that are in need of occupants, so if there were ever a good time to distribute more green cards, this may be it.
However, the cards-with-houses proposal is not just about cards, and therein lie its weaknesses: It proposes to tie the green card to a housing purchase. As a result, the proposal is excessively interventionist and, compared with the simpler alternative of just distributing more green cards, would not achieve its desired effect (raise housing prices).
If green cards were sold without housing-purchase conditions, that would bolster housing demand and (in the short run, before additional housing might be built to accommodate the extra demand) therefore prices. The reason is that foreigners working in the United States (that’s the purpose of the green card — to make it easier to work here) need to live somewhere in the United States.
Adding a housing purchase condition to green card distribution, and wiping out the old means for obtaining green cards, would not bolster housing demand. It would only reduce the willingness of skilled immigrants to seek a green card. With the extra condition, immigrants would have to either buy a house that they would have purchased anyway (see above), or turn around and rent or sell the housing in the case that they do not really want to own one. Either way, housing demand would be unaffected.
As with many well-intentioned policy proposals, the cards-with-houses policy quickly degenerates into government micro-management. The authors of the proposal recognize the resale problem, and think they can “solve” it by having government authorities watch for several years to make sure that the immigrants still own, and do not rent out, the houses they have purchased. But as everyone in New York knows from witnessing (or partaking in) rent control cheating, it is quite difficult to police who lives in which house.
The simpler and more efficient alternative is to drop the house-purchase requirement — just distribute more green cards to skilled foreigners — and trust that immigrants have to live somewhere and will thereby bolster housing demand.
Tuesday, March 24, 2009
So much for yesterday's "Housing prices plunge headline"!
For a while I have been saying that the housing market -- housing prices and construction -- would hit bottom in early 2009 and housing construction would be pretty normal by summer:
- I noted the OFHEO housing price index had already stopped falling before the end of 2008.
- I noted that construction prices were hardly falling any more (see also here).
- I noted that housing starts made a turnaround in February.
- Most important, I noted in 2008 that by summer 2009 population will have caught up with the housing stock.
It is helpful to compare the purchase price for a house to the cost of construction, because the higher is the former relative to the latter, the greater the incentive to build more houses. The chart below shows the monthly OFHEO housing price index compared to the PPI for residential construction: January 2009 is above every single month since July 2008!
You have to dig to find a headline on this, but here's one from AP "Home prices post 6.3 pct annual decline in January". Notice that the reporter is looking at the same data as shown above, but apparently needs a bad news headline in order to collect his/her paycheck, so that's what you get.
Monday, March 23, 2009
Low employment was a tremendous problem during the Great Depression of the 1930s. That problem created an excuse for some shameful and ultimately regretted labor market policies, such as the barring of married women from some jobs. Reminders of this pattern are already starting to be seen in today’s recession: the Employ American Workers Act (a part of the stimulus bill) makes it difficult for companies helped by the federal bailout plan known as TARP to hire skilled immigrants.
Policies like these, and the discrimination that usually goes with them, are fueled by the mistaken theory that a job held by an immigrant is a job that cannot be held by an American. We will ultimately see the Employ American Workers Act as unjustified, just as we now regret the “marriage bars.”
The “marriage bar” is a discriminatory employment practice that was common years ago, even if it seems unfamiliar today. The marriage bar actually had a couple of versions: a “hire bar” in which a woman would not be hired if she were married, and a “retain bar” in which single female employees were fired when they married.
Professor Claudia Goldin’s book “Understanding the Gender Gap” explains some of the historical evidence showing that marriage bars proliferated during the Great Depression.
National Education Association surveys indicate that, as of 1928 (just before the Depression), 61 percent of school districts had a hire bar, and 52 percent had a retain bar. By 1942 (after the Depression), the percentages had increased to 87 and 70. Two office firm surveys indicate that school districts were not alone in putting these policies in place, and that the 1930s was a time of significant increase in their practice.
Today it is difficult to fully understand the historical origins of these practices, but we strongly suspect that “saving jobs” served as an excuse, especially during a time of low employment like the 1930s, because jobs were portrayed as a zero-sum game. A job held by a married woman, so the story goes, takes away a job from a head of household (that is, a man, or perhaps a single woman). Supposedly these bars would create jobs for heads of households.
The Census Bureau has measured the employment situation every year since the 1960s. The chart below uses that data to show how the “zero sum” theory was refuted by the subsequent history.
Among people aged 25-54 (25-54 are prime ages for working, before retirements of some cohort members) in 1967, 14 percent were women working full-time jobs throughout the year and 39 percent were men working full-time jobs throughout the year (the remaining 47 percent were men and women not working). By the year 2006, 26 percent of people in that age group were women with full-time jobs throughout the year.
According to the “zero sum” theory, male employment should have fallen to 27 percent of the people in that age group — each woman hired would represent a man not hired. In fact, by 2006 men working full time throughout the year were still 39 percent of people aged 25-54. That is, the labor market was able to absorb millions of women workers without losing jobs for men.
Thankfully, marriage bars are recognized today to be both politically and economically incorrect. But the “zero sum” theory still thrives in political rhetoric, as in “Take This Job and Ship It,” a book by Senator Byron L. Dorgan, which claims that every job created for our trading partners is one less job for Americans.
And as mentioned earlier, the theory has even found its way into the stimulus bill, now to oppose the hiring of skilled foreign-born workers. Perhaps that hiring might harm particular groups in the short run, but economics recognizes that on the whole international trade and migration create opportunities for Americans.
- 11 percent of global skyscraper construction has been halted. I think that means that 89 percent continues.
- In the U.S., it's 10 percent halted and 90 percent continuing.
- In Chicago, delinquency rates on construction loans were 15 percent in 2008 Q4.
To me, these results show no sign of a credit crunch. First of all, recall that construction requires ongoing credit, so that a credit crunch -- if it existed -- should be readily visible in skyscraper construction. Second, note that some of the planned skyscrapers were residential, such as the halted "Chicago Spire." Given the realization circa 2007 that we have too much residential housing, much residential construction should have been halted even without a credit crunch.
From this perspective, it is remarkable that 90 percent of skyscrapers continue to go up. I have been watching four of them (three residential and one commercial) out my window since last summer.
Sunday, March 22, 2009
Wednesday, March 18, 2009
That may break a pattern that, prior to February, was all too similar to 1929-30. The chart below displays the (seasonally unadjusted) CPI for 2008-9 and 1929-30.
Greenport is a small town near the end of Long Island’s North Fork, about 100 miles from New York City. Its small high school serves the town and neighboring villages, graduating about 50 men and women each year.
Athletes at such a small school rarely specialize. For those schools to field even a small variety of teams – basketball, football, baseball, etc. – many athletes may play multiple sports. But in high school, as in life, those who do not specialize in one task are unlikely to be as productive as those who do, even while those who undertake multiple tasks may find the variety in their work to be more enjoyable.
The advantages and disadvantages of specialization in the adult world are readily seen in the medical field. Research has shown, and pay scales confirm, that highly specialized medical doctors are more productive – make better diagnoses and fewer mistakes – than do general internists and general practitioners.
Yet every year many talented new medical school graduates choose to become general internists and general practitioners – and thereby receive less pay than that available from specialties – because they enjoy the variety of patients and situations to, say, performing the same surgery over and over again. And some of them may want to live in small towns like Greenport, N.Y., that do not have enough people to keep a specialist busy.
Some people think that members of the adult work force seek to maximize their incomes, and on this basis conclude that income taxes do not affect worker behavior. After all, they claim, maximizing all of your income is the same as maximizing half of your income, so what decision-making difference does it make whether the government takes half?
Taxes and regulation do make a difference in these kinds of choices, because workers do not simply maximize their income. Like the medical school graduates and Greenport High School athletes, people everywhere consider giving up some income and productivity in order to live a fuller life in some other way. They choose the more specialized career path when the extra income or production more than offsets the amenities of being less specialized.
Income taxes take no part of the joy from having a variety of work tasks, living in a small town, and many of the other amenities that come from the less specialized career path. Income taxes do take part of workers’ incomes, and therefore part of the reward of the more specialized career path. The higher the income tax rate, the more likely people are to look at the less specialized option.
The Greenport High School Porters consider the costs and benefits of specialization, too. One thing that makes this year’s team successful is that members have been focused on basketball. Although basketball is formally a winter sport, many of the Porters forgo other pastimes all year round. Among other things, many of the Porters take part in off-season basketball leagues, even in the summer, when Greenport offers great fishing, boating, etc.
The result for Greenport High School has been victories over schools many times its size, and maybe a state championship this weekend. In Greenport, as in the rest of the economy, productivity and success are made from effort and specialization.
Tuesday, March 17, 2009
The chart below shows why I think the construction PPI has been evolving differently so far in 2009.
Monday, March 16, 2009
Industry is a smaller share of our economy now than then.
Friday, March 13, 2009
This is good news if you keep your job. This is bad news if you think high employee pay encourages employers to fire people.
Thursday, March 12, 2009
Thanks to unemployment compensation, high rates of pay for many of those who still have jobs, and last year's increase in social security benefits, real disposable personal incomes have been rising for the last six months.
Yet 12 percent of households with mortgages are late on their mortgage payments. Just yesterday I read how, in a Catholic high school near Chicago, 20 percent (sic) of the students were taken out of class because they were delinquent on their tuition payments [employment in the Chicago area has fallen about the same -- a bit less -- than it has in the nation].
The press account of delinquencies is that people lost their jobs. But the arithmetic doesn't add up. Either the official statistics on job loss are way too low, or most of the delinquencies are by people who kept their jobs.
Why would so many people who kept their jobs be delinquent?
When it comes to mortgage payments, I understand:
- housing prices have fallen, leaving many houses under water (the house is worth less than the mortgage)
- under water mortgages (12 million or more) are much more common than job loss (4 million)
- often, it is a good financial decision to stop paying the bank on an underwater mortgage -- you could move into a nicer house for cheaper than you're paying now
But why pay the Catholic school tuition late (and likely other bills too)?
Were a lot of people using home equity to pay high school tuition? I am dubious of that explanation, because the home equity was already gone when school started last fall.
Any ideas, commenters?
Wednesday, March 11, 2009
The amount of disposable income that Americans have had available to spend has continued to increase since last August, while the amount they have actually spent has been dropping. This suggests that the fundamental cause of low consumption spending is consumers’ recognition that their homes and businesses are worth less. It also suggests that consumer spending may be headed even lower.
The chart below graphs monthly personal disposable income and consumption expenditure since July 2008, both adjusted for inflation. The former has been rising since August and the latter falling most of the months since June.
Personal disposable income measures the income that households actually receive (net of taxes) from their jobs, from dividends and net interest on investments, and from government transfers like Social Security. It is income households have available to spend or save.
If severe enough, reductions in personal income would require households to spend less on goods and services. But for several reasons, personal income has actually been rising despite the recession: Millions of people (so far) remain employed and paid well; corporations with slack earnings continue to pay their dividend; unemployment insurance payments have been rising; and Social Security payments were increased.
Many people have reduced their purchases of goods and services in spite of rising disposable incomes because they recognize that their homes are worth less, any shares of a business they own are worth less (despite the business’s continued dividend), and those still employed are concerned that they may be part of the next layoff.
The year 2008 finished with a lot of bad news that legitimized these concerns. But even with such a modest starting point, 2009 has had plenty of bad news of its own, including a 20 percent (or more) stock market decline and a further sharp reduction in employer payrolls. It seems that consumers could legitimately cut their spending yet again in February, March and April.
Tuesday, March 10, 2009
I agree, although I would replace "a theoretical justification" with "an alluring justification"
I am not sure of what is Roubini's reason, but my view is the heavy damage is created by distinguishing among mortgages -- everybody attempts to get theirs in the favor category -- avoided by treating all mortgages the same.
Sunday, March 8, 2009
I believe that both of the Senators in the report voted for the first bank bailout. So maybe more politicians are adopting the opinion that bank bailouts waste tax dollars.
Friday, March 6, 2009
As you can see below, the employment prediction was wrong.
Another key prediction -- that real GDP would stay above $11 trillion -- is still correct by a wide margin. This prediction will probably hold true, but the bad productivity data lately make me worry that I might someday be wrong on this one.
If and when GDP is below $11 trillion and employment is below 134 million, I call that a "severe" recession -- at least as bad as those in the 1970s and 1980s.
Thursday, March 5, 2009
That's why the BLS release today (drastically revising its earlier estimates) is discouraging. It reported that productivity declined slightly.
The chart below (Fig 5 from my NBER working paper, revised with the new BLS data) compares productivity in this recession with previous ones. For the first three quarters, productivity was rising, making it quite unlike the 1970s and 1980s recession, and quite unlike the Great Depression of the 1930s.
In this situation, a slight decline is bad news because productivity ought to rise when employment falls. This is why I calculate a "productivity residual" -- what productivity would be if labor usage had been constant. The chart below (Fig 6 from my NBER working paper, revised with the new BLS data). The productivity residual change 2008 Q3-Q4 looks a lot like the 1970s and 1980s recession.
If the Q3-Q4 changes continue, this recession will look like no other since the 1930s in that both productivity and labor supply/labor distortions would be getting worse at the same time.
It still looks like "labor distortions" explain the majority of Q4's employment decline, but now it looks an adverse "productivity shock" was pushing labor in the same direction.
Wednesday, March 4, 2009
In addition, it was reported today that one in five home mortgages are under water. Last fall, it was thought to be one in ten or one in twelve.
There is a third possibility: the 2009 crash is due to a shock like the anticipation of a dividend tax that directly harms stockholders but may have little effect on economic growth. I guess that's bad news itself: we would hope for option three!
Tuesday, March 3, 2009
Monday, March 2, 2009
- nonresidential construction had been increasing during most of the recession
- the stock of nonresidential buildings in place is already pretty low, thanks to the housing boom.
We can do without housing construction for a while, but not without nonresidential building UNLESS our economy is due to shrink.
The economy did shrink 1.6% in Q4, I have not yet done the work required to determine whether
- the low construction spending in January is just an adjustment to the Q4 reality, or
- it reflects even worse expectations about the future, or
- it reflects the onset of a credit crunch.
The chart below (including the BEA's release this morning) shows that payroll spending has barely hiccuped, let alone collapsed, in the four months since those alarms were issued.
Although something is clearly awry in this economy, it is hard to show that a credit crunch is that important, given that trillions of dollars continue to flow from business to households in the form of wages and other personal income items.
January real personal income per capita was higher than in any month in U.S. history, with the exception of May 2008.
This is the second time in three months that real consumption spending has increased.
Even bigger news: the news media is actually reporting on this not-so-terrible data.