Wednesday, April 28, 2010
Good News from the Housing Sector
Copyright, The New York Times Company
Recent reports on housing starts, new home sales and housing prices show that the housing recovery continues.
The housing crash is the single most important factor that started this recession, so it would be nice to know when it will end.
Although the housing inventory exceeded the demand in 2007 and 2008, we have known for a while that the fundamental supply and demand ingredients would permit a genuine housing recovery to begin in 2009. As demand caught up, housing prices stopped falling and stabilized at more normal levels.
Although housing prices should not be expected to return to their 2005 peak any time soon, housing sector data released last week suggest that housing prices can head somewhat higher. Housing permits and housing starts have continued higher in the last couple of months. New home sales were higher in March than they had been for a while.
Although the Case-Shiller home price index for January and February was slightly lower than it was at the end of 2009, the message was somewhat different from a government report last week on the producer price index for single-unit residential construction through March 2010. That index measures the average change over time in the cost of materials for making new homes. The chart below displays the index for each month since January 2008. The index has increased 3 percent since last summer, when it was 5 percent off its high.
The producer price index is of economic interest because it is an important determinant of the prices of existing homes. Few people want to pay more for an existing house than they would pay for having one built new. As a result, the housing producer price index is an important ingredient for economic forecasts of housing prices.
Inflation hawks may say that the housing producer price index is a harbinger of economywide inflation to come. It’s quite possible that inflation-adjusted housing prices will not significantly increase, but even a housing price increase resulted merely from general inflation, would be welcome, because anything that raises housing prices can help alleviate the extraordinary prevalence of foreclosures that derives largely from the fact that debt-strapped homeowners can no longer sell their homes for enough to cover their mortgage.
That’s one reason why it was good news last week that the costs and amounts of housing construction continue to rise.
Recent reports on housing starts, new home sales and housing prices show that the housing recovery continues.
The housing crash is the single most important factor that started this recession, so it would be nice to know when it will end.
Although the housing inventory exceeded the demand in 2007 and 2008, we have known for a while that the fundamental supply and demand ingredients would permit a genuine housing recovery to begin in 2009. As demand caught up, housing prices stopped falling and stabilized at more normal levels.
Although housing prices should not be expected to return to their 2005 peak any time soon, housing sector data released last week suggest that housing prices can head somewhat higher. Housing permits and housing starts have continued higher in the last couple of months. New home sales were higher in March than they had been for a while.
Although the Case-Shiller home price index for January and February was slightly lower than it was at the end of 2009, the message was somewhat different from a government report last week on the producer price index for single-unit residential construction through March 2010. That index measures the average change over time in the cost of materials for making new homes. The chart below displays the index for each month since January 2008. The index has increased 3 percent since last summer, when it was 5 percent off its high.
The producer price index is of economic interest because it is an important determinant of the prices of existing homes. Few people want to pay more for an existing house than they would pay for having one built new. As a result, the housing producer price index is an important ingredient for economic forecasts of housing prices.
Inflation hawks may say that the housing producer price index is a harbinger of economywide inflation to come. It’s quite possible that inflation-adjusted housing prices will not significantly increase, but even a housing price increase resulted merely from general inflation, would be welcome, because anything that raises housing prices can help alleviate the extraordinary prevalence of foreclosures that derives largely from the fact that debt-strapped homeowners can no longer sell their homes for enough to cover their mortgage.
That’s one reason why it was good news last week that the costs and amounts of housing construction continue to rise.
Monday, April 26, 2010
Thursday, April 22, 2010
Housing PPI: Wow!
Higher nominal housing prices would improve economic efficiency, and the costs of construction are an important determinant of housing prices. The big news today is that construction costs are significantly higher than they were 9 months ago.
The chart below shows how construction costs stopped falling in the first half 2009, and now have increased significantly. Today's BLS estimate of Mar 2010 construction costs is part of the increase; another part comes from recent BLS revisions of the 2009 data (for pre-revision data, see here).
The chart below shows how construction costs stopped falling in the first half 2009, and now have increased significantly. Today's BLS estimate of Mar 2010 construction costs is part of the increase; another part comes from recent BLS revisions of the 2009 data (for pre-revision data, see here).
Wednesday, April 21, 2010
Invisible Tax Work by Professor Galle
For those who want to work further on the visibility of taxes, you will find this note I received to be of interest. The "visibility" hypothesis is seductive, but never confirmed with actual observations - the best kind of topic for research!
emailed to me from bgalle at law.gwu.edu:
"I've made similar claims [that visible taxes do not help restrain spending], albeit informally (not mathematically modeled) and in fora not usually of interest to economists (i.e., in law journals).
One place is pp. 41-48 of this piece, "Hidden Taxes," http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1359865. Another is pp. 59--62 of this piece, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1590466, which has a long title but is about the AMT. The argument of both is that hidden taxes may on net reduce tax levels, because sophisticates increase their own lobbying effort in response to their awareness that naives who do not lobby exist.
I'm also interested in modeling these intuitions more rigorously, as well as testing them empirically, but my own math skills are more suited to discussing rather than crafting such work. If you have or know of graduate students with similar interests, please feel free to put them in touch.
Many thanks.
Best,
Brian
Brian Galle
Visiting Associate Professor
George Washington University Law School (2009-10)
Assistant Professor
Florida State University College of Law"
emailed to me from bgalle at law.gwu.edu:
"I've made similar claims [that visible taxes do not help restrain spending], albeit informally (not mathematically modeled) and in fora not usually of interest to economists (i.e., in law journals).
One place is pp. 41-48 of this piece, "Hidden Taxes," http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1359865. Another is pp. 59--62 of this piece, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1590466, which has a long title but is about the AMT. The argument of both is that hidden taxes may on net reduce tax levels, because sophisticates increase their own lobbying effort in response to their awareness that naives who do not lobby exist.
I'm also interested in modeling these intuitions more rigorously, as well as testing them empirically, but my own math skills are more suited to discussing rather than crafting such work. If you have or know of graduate students with similar interests, please feel free to put them in touch.
Many thanks.
Best,
Brian
Brian Galle
Visiting Associate Professor
George Washington University Law School (2009-10)
Assistant Professor
Florida State University College of Law"
Don't Fear the Invisible Tax
Copyright, The New York Times Company
Opponents of the value-added tax complain that it is not sufficiently visible to voters, and is thereby an obstacle to responsible public spending. But in fact government spending is no lower in countries with more visible taxes.
Last week I explained how reforming the income tax system — perhaps by replacing it with a more efficient value-added tax (VAT) — might fuel further growth in government spending because less efficient taxes create more political pressure against big government.
Some economists agree with my conclusion, but for a different reason. Because the VAT is collected at each stage of production and, unlike our state and local sales taxes, is not shown to consumers separately from purchase prices, it has been said that VATs are not visible enough to voters to create much electoral resistance to raising their rates.
John Kass of The Chicago Tribune even suggested perhaps the ultimate in tax visibility — that income taxes be collected only once per year: the day before election day.
The pattern of social security taxes across countries provides a test of these theories, because countries differ in how they collect public pension payroll taxes. Some countries, such as the Netherlands, take most of the tax out of employee paychecks, while others, such as France, levy most of the payroll tax on employers. The United States and several other countries take an equal amount from employee paychecks and from employers.
Payroll taxes are no less efficient if they are taken from employers rather than employees, but the taxes on employees are clearly more visible to employees. Indeed, economists themselves sometimes forget that their employer is liable for payroll taxes on their behalf!
Together with Xavier Sala-i-Martin of Columbia University and Ricard Gil of the University of California, Santa Cruz, I studied the patterns of payroll tax collections across countries over the years 1958-95.
Interestingly, democracies collect the payroll tax more visibly (that is, a greater share from employee paychecks) than nondemocracies do. But countries that put more of the tax on employees do not manage to spend less on public pensions (Social Security, as we call it in the United States).
The scatter diagram below shows public pension spending as a percentage of gross domestic product, versus the fraction of payroll taxes levied on employees rather than employers. Countries such as the United States with equal payments by employers and employees are shown up the middle of the chart: they all have an employee share of 0.5 but each has its own different propensity to spend on public pensions.
If more visible payroll taxes helped restrain payroll taxation, then we should see countries that take relatively more of the payroll tax from employees rather than employers — those in the right part of the chart — spending less of their G.D.P. on the public pensions for which these taxes are earmarked.
Instead, the correlation between the two variables is essentially zero (neither economically nor statistically significant). This result holds up when adjusting for a host of other variables that determine public pension spending, and excluding the Netherlands (an apparent outlier in its payroll tax collection).
I am not especially surprised that tax visibility is empirically unrelated to the amount of taxation and government spending, because the impressions of voters who see the more visible taxes are by no means the only determinant of government spending. Special interests matter too.
And even governments that are not held accountable by elections manage to restrain their taxation as much (or little) as democracies do.
In the case of the payroll tax, one of the important interest groups would be the employers themselves, who are of course quite aware of payroll taxes levied upon them. Employers may even resist such taxes more if they thought those taxes were invisible to, and thereby unappreciated by, their employees.
It is wise to consider how transforming our tax system might affect the propensity of government to spend. But making taxes more visible to voters would be all show, and deliver no results.
Opponents of the value-added tax complain that it is not sufficiently visible to voters, and is thereby an obstacle to responsible public spending. But in fact government spending is no lower in countries with more visible taxes.
Last week I explained how reforming the income tax system — perhaps by replacing it with a more efficient value-added tax (VAT) — might fuel further growth in government spending because less efficient taxes create more political pressure against big government.
Some economists agree with my conclusion, but for a different reason. Because the VAT is collected at each stage of production and, unlike our state and local sales taxes, is not shown to consumers separately from purchase prices, it has been said that VATs are not visible enough to voters to create much electoral resistance to raising their rates.
John Kass of The Chicago Tribune even suggested perhaps the ultimate in tax visibility — that income taxes be collected only once per year: the day before election day.
The pattern of social security taxes across countries provides a test of these theories, because countries differ in how they collect public pension payroll taxes. Some countries, such as the Netherlands, take most of the tax out of employee paychecks, while others, such as France, levy most of the payroll tax on employers. The United States and several other countries take an equal amount from employee paychecks and from employers.
Payroll taxes are no less efficient if they are taken from employers rather than employees, but the taxes on employees are clearly more visible to employees. Indeed, economists themselves sometimes forget that their employer is liable for payroll taxes on their behalf!
Together with Xavier Sala-i-Martin of Columbia University and Ricard Gil of the University of California, Santa Cruz, I studied the patterns of payroll tax collections across countries over the years 1958-95.
Interestingly, democracies collect the payroll tax more visibly (that is, a greater share from employee paychecks) than nondemocracies do. But countries that put more of the tax on employees do not manage to spend less on public pensions (Social Security, as we call it in the United States).
The scatter diagram below shows public pension spending as a percentage of gross domestic product, versus the fraction of payroll taxes levied on employees rather than employers. Countries such as the United States with equal payments by employers and employees are shown up the middle of the chart: they all have an employee share of 0.5 but each has its own different propensity to spend on public pensions.
If more visible payroll taxes helped restrain payroll taxation, then we should see countries that take relatively more of the payroll tax from employees rather than employers — those in the right part of the chart — spending less of their G.D.P. on the public pensions for which these taxes are earmarked.
Instead, the correlation between the two variables is essentially zero (neither economically nor statistically significant). This result holds up when adjusting for a host of other variables that determine public pension spending, and excluding the Netherlands (an apparent outlier in its payroll tax collection).
I am not especially surprised that tax visibility is empirically unrelated to the amount of taxation and government spending, because the impressions of voters who see the more visible taxes are by no means the only determinant of government spending. Special interests matter too.
And even governments that are not held accountable by elections manage to restrain their taxation as much (or little) as democracies do.
In the case of the payroll tax, one of the important interest groups would be the employers themselves, who are of course quite aware of payroll taxes levied upon them. Employers may even resist such taxes more if they thought those taxes were invisible to, and thereby unappreciated by, their employees.
It is wise to consider how transforming our tax system might affect the propensity of government to spend. But making taxes more visible to voters would be all show, and deliver no results.
Sunday, April 18, 2010
Friday, April 16, 2010
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