Wednesday, April 29, 2009
Below is a chart (I made this for my World Bank presentation two weeks ago) decomposing the labor changes in this recession into supply changes and distortion changes. I post in now because it fits very closely with the BEA's release this morning. The MRS series says that labor supply stopped shifting out (consumption declines have stopped), which means that "distortions" (green series) had less of a role in reducing labor than they did in previous quarters.
[Technical note: "MRS" is the consumption-leisure ratio, and distortion is the gap between output per hour and MRS]
Back in the 1980s, scientists were educating the population on the seriousness of the spread of the H.I.V. virus. H.I.V. is passed among humans, and scientists thought H.I.V./AIDS would spread to a large fraction of the populations in the United States and elsewhere as more people contacted greater numbers of persons carrying it. Indeed, at that early stage scientists had already observed exponential growth (that is, growth at ever-increasing rates) of H.I.V./AIDS prevalence.
However, the medical community’s 1980s consensus on the future of H.I.V./AIDS prevalence was at odds with economic theory. Professors Tomas Philipson and Richard A. Posner at the University of Chicago pointed out that people consider — and sometimes take — steps for protecting themselves against contagious disease.
Although Professors Philipson and Posner were harshly criticized at the time, they turned out to be correct about the future of H.I.V./AIDS prevalence in the United States. According to AVERT.org, AIDS diagnoses and deaths peaked in the United States not long after Professors Philipson and Posner published their book “ Private Choices and Public Health: The AIDS Epidemic in an Economic Perspective.”
A similar prevalence pattern among humans is likely to be true for the swine flu.
Tuesday, April 28, 2009
[Although Professor Goolsbee came to the wrong conclusion on scientific research subsidies, I admire how he reframed the issues of tax and expenditure subsidies. I agree with him on the methodology point that it is often helpful to consider whether short run supply is elastic.]
Monday, April 27, 2009
"I spent last year working in credit research at a large MBS hedge fund and as part of my job I investigated the RPX index, meeting with representatives of their company at several conferences.
In summary, I would be very suspicious of numbers coming from their index. Their methodology is quite strange and at least as of 10 months ago trade in the contracts was very light making the predictive power of the futures prices suspect.
On the plus side, at least historically their index tracks Case-Shiller quite closely. However, their index is substantially more volatile.
More information on how they compute their index can be found at this address:
Their index is based on the distribution of price-per-square- foot transactions in a given region over a given time interval. They do not differentiate between new and old housing stock, so their index is not constant quality.
Further, they report that their index is computed daily or monthly, but given the frequency with which transactions databases are updated this is not possible. I suspect they just use whatever data they have as of certain date, which means heterogenaity in county reporting speeds can bias their index."
Either way, it is still cheaper to buy a house via RPX (if you can do that) rather than from an actual homeowner.
Friday, April 24, 2009
I don't know anything about the details of the RPX market operations, but it seems that it is cheaper to buy a house via RPX than to purchase an actual house.
Thursday, April 23, 2009
Wednesday, April 22, 2009
Housing construction will resume when housing demand exceeds housing supply. But that raises the question: What will happen to housing demand?
Tuesday, April 21, 2009
Read Dr. Wheelen's account.
He says "The harder [running for office] is to do -- in terms of time, fundraising, personal disclosure, and poor pay -- the fewer quality people we should reasonably expect to do it. "
I agree with his prediction (although not that "few quality people" is necessarily a bad outcome). This basic reasoning tells us a lot about what kinds of public policies get made. See, for example
Monday, April 20, 2009
To put this in perspective, I am predicting that real GDP 2009 Q1 will be about $45 billion in less than 2008 Q4 in aggregate, or $150 per person. This is on top of the $230 per person lost in 2008 Q4, for a grand total of $610 lost per person in the last two quarters.
Thursday, April 16, 2009
Wednesday, April 15, 2009
- stock prices fell a lot in September, even without much change in the (already bad) housing fundamentals
- "complex securities" are not that complex (that is, undergrad econ tools can be used to understand them)
- even if the "complex securities" like CDS's are complex, they are no more complex than securities that have existed for centuries, such as equity in non-financial business firms.
Here is the comparison with the 1930s (both series are seasonally unadjusted because the 1930s seasonal adjustment is not available).
The individual income tax is the federal government’s single biggest tax. It is a (complicated) function of each family’s income from wages, investments and other sources. Approximate individual income tax payments are often (but not always) withheld from wages, but the annual filing of the infamous Form 1040 is the time when Americans pay the individual income taxes on their other income, and sharpen their pencils on the individual income taxes they owe on their wages.
The individual income tax is the subject of much analysis of its fairness. For example, the Tax Foundation reported last summer that “in 2006, the top 1 percent of tax returns paid 39.9 percent of all federal individual income taxes and earned 22.1 percent of adjusted gross income.”
However, the individual income tax is misleading both in terms of total amount paid and its distribution across families. For example, on Friday the Treasury Department reported that federal tax receipts for the 12 months from April 2008 to March 2009 were $2.37 trillion, only $1.07 trillion (45 percent) of which were individual income tax collections.
Although officially known as a “contribution,” the Social Security tax brings in almost as much revenue as the individual income tax, and is catching up. The chart below shows Treasury collections of the two taxes (in order to adjust for seasonality, the chart shows the average over the prior 12 months).
Since the recession began, individual income tax collections have fallen from $1,186 billion to $1,072 billion, whereas Social Security tax collections (inclusive of the Medicare tax) have increased from $837 billion to $859 billion. Thus, for every dollar paid on Form 1040, there is 80 cents paid in Social Security tax.
The distribution of the two taxes’ payments across families is quite different: a sizable majority of Americans pay more in Social Security taxes than they pay in individual income taxes.
Partly because the Social Security tax takes so much from taxpayer wallets and because it is less visible than the individual income taxes, some Americans get themselves into trouble by neglecting to pay all of their Social Security tax. Before his confirmation as Treasury secretary, Timothy F. Geithner himself was embarrassed in January when it was revealed that he had neglected to pay Social Security and Medicare taxes for several years. Over the years, other senior civil servants have also been embarrassed by revelations that they’d failed to pay Social Security taxes on household help (including acommissioner and an acting commissioner of the Social Security Administration).
For the Social Security tax, it is tough growing up in the shadow of Form 1040.
Tuesday, April 14, 2009
The PPI-SOP for construction actually rose a bit in March after rising in January and February.
Monday, April 13, 2009
Friday, April 10, 2009
It is neither a coincidence nor a surprise that Goldman issues shares at the same time that they repay their TARP money. I explained last fall how Treasury "capital injections" just result in greater payments to bank industry shareholders. One (of many ways) it could work is that a bank receiving TARP money would either buy back its shares (or buy, for cash, shares of competitors), or use the Treasury funds to forestall raising new capital that (thanks to the recession and housing crash) would have been necessary.
Politicians told us that TARP money was actually going to be lent to bank customers, rather than paid to shareholders -- they were wrong.
For more examples, see my posts under the "bailout" label.
Wednesday, April 8, 2009
Hybrid automobiles can save gas, especially in urban driving conditions when the automobile is moving slowly or idling, when alternative power sources have a bigger advantage. A problem is that the purchase price of hybrid vehicles is often higher, and many are less spacious than the more ubiquitous sport utility vehicles.
A significant fraction of the taxicab fleet may be well suited for hybrids, because many of the miles driven are in urban conditions, and often the vehicles have only one passenger. Thus I have been surprised to notice so few hybrid taxis in Chicago, where less than 1 percent of cabs are hybrids.
In an admittedly unscientific survey, I watched for Toyota taxis with about 100,000 miles. I assumed that many drivers of Toyotas would be likely to buy a Toyota for their next taxi, and that the Prius — the company’s hybrid model — would get their consideration. I asked the drivers about buying a Prius.
The drivers told me about the Chicago City Council’s debates about transforming the city’s taxi fleet.
The council has debated mandating hybrid purchases. But the rumor among taxi drivers is that in addition, or perhaps instead, the city or other government agency will eventually subsidize the purchase of a hybrid.
Regardless of whether it is realistic to expect Chicago to someday subsidize purchases of hybrid taxis, the fact is that some cab drivers are considering the possibility. If taxi drivers consider future subsidies in their industry, then so must bank executives.
Last fall the public learned that banks were not selling many of their legacy mortgages and mortgage-backed securities, despite the impression that ownership of the assets were hindering the banks’ lending. A variety of theories have been put forward to explain this failure, and to suggest what the government might do to fix it.
But the lack of trade in mortgage-backed securities may have something in common with the lack of trade in hybrid Chicago taxicabs. The secondary market for legacy mortgages may have stagnated largely because of the (ultimately correct) anticipation of a huge government subsidy. As I wrote last week, banks were not “unable” to sell their legacy mortgages; they were prudently unwilling to sell because they expected the government to eventually step in and help push the prices of the assets higher.
Friday, April 3, 2009
Wednesday, April 1, 2009
Also reported today was a February increase in pending home sales.
Interestingly, non-residential construction stopped its brief decline, and remains higher than it was at the start of the recession and dramatically higher than it was during the housing boom.
Banks own mortgages (either directly, or through ownership of mortgage-backed securities) whose values plummeted in 2008, because the mortgages are collateralized with real estates whose values crashed.
Conventional wisdom about the banking crisis says that bank lending to the wider economy cannot occur because banks have been unable to sell these assets, which adds to their difficulties in making new loans.
As United States Treasury Secretary Timothy Geithner says, a secondary market for mortgages “does not now exist” because there is a “lack of clarity about the value of these legacy assets [which makes] it difficult for some financial institutions to raise new private capital on their own."
I agree that (to a good approximation) a secondary market for legacy mortgages does not exist. But the biggest reason is not lack of clarity, but rather the lack of a viable government policy to deal with the banking crisis. Until now, perhaps.
But let’s stick with the conventional wisdom for a moment more. According to that wisdom, it does not help for the Treasury and the FDIC to subsidize and leverage the purchase of legacy mortgages from banks as Secretary Geithner proposes, because the plan does nothing to (a) create clarity in legacy asset value or (b) ensure that banks no longer have significant direct or indirect holdings of mortgages on their balance sheets.
As Professors Paul Krugman and Joseph Stiglitz have explained, the Geithner Plan does increase the value of legacy mortgages to its owners, because it subsidizes the purchase of them. But it does not increase the clarity of those values, and in fact reduces clarity.
Consider an example, again from the conventional wisdom. Market participants are not sure whether a pool of mortgages will be worth $30 million or $50 million, and are concerned that the current owner knows a bit better and thus will offer for sale only the weakest of the weak. This $20 million worth of uncertainty, according to Secretary Geithner and the conventional wisdom, stops the secondary market from operating.
Thanks to the emergence of the Geithner plan’s subsidy and its leverage, the pool of legacy mortgages last week suddenly became worth $40 to $90 million (the Geithner subsidy raises private investors’ value of all types of bad mortgages, and its leverage increases the gap between the value of the best and the value of the worst). Yes, the legacy mortgages are worth more, but the profit of owning them is now less certain.
To make matters worse, the Geithner plan has no provision to stop banks from funding some of the ventures that will purchase the banks’ own legacy assets. The result may be bank ownership of mortgages that is less direct, but ownership nonetheless.
Thus, if the conventional wisdom is right, this plan will fail because it creates no clarity, and it does little to separate banking from legacy mortgage ownership.
But I believe that the conventional wisdom is highly exaggerated. Instead, the secondary market for legacy mortgages has stagnated largely because of the (ultimately correct) anticipation of a massive government subsidy. Banks were not “unable” to sell their legacy mortgages; they were prudently unwilling to sell because they expected the government to eventually step in and help push the prices of those assets higher.
We all witnessed last week the massive capital gains to banks that came with the unveiling of the Geithner plan. A bank would have been foolish to sell off its legacy mortgages during the fall or winter, before such a plan was unveiled and executed, because a fall or winter non-bank buyer of legacy mortgages would likely be ineligible for the ultimate subsidy.
Thus, the secondary market for legacy mortgages has failed so far due to the lack of a plan rather than a lack of clarity. In order to get the market operating again, the Geithner plan does not need to alleviate the market weakness improperly identified by its authors, but only needs to stay on the path to execution.