Tuesday, November 30, 2010

Yes, money buys happiness

It's an old saying, "Money doesn't buy happiness." But, it turns out it might not be true. Higher incomes are associated with greater happiness across countries. According to The Economist, the key to spotting the correlation is to use a logarithmic scale rather than a linear one.
[Economists] who look at happiness often contend that, beyond a GDP per capita of just $15,000 (measured at purchasing-power parity), money does not buy happiness. ... But plot the data another way, on a logarithmic scale where each increment represents a 100% increase in income per head, and the relationship between wealth and happiness looks more robust.
Myth busted, apparently.

Monday, November 29, 2010

Pass the DREAM Act

Immigrants built this country. They will continue building it if a xenophobic public doesn't kick them out. College graduates are especially beneficial to the U.S. economy. We should encourage immigrants, even undocumented immigrants, to graduate from college and then stay here.

Thursday, November 25, 2010

New home sales down 28.5%, building permits down 4.2% in October 2010

New single-family home sales fell 28.5% year-over-year in October, from 396,000 in October 2009. Month-over-month, the decline was 8.1%:
New home sales tumbled in October while the median home price dropped to the lowest point in seven years.

Sales of new single-family homes declined 8.1 percent to a seasonally adjusted annual rate of 283,000 units in October, the Commerce Department reported Wednesday.

It was the fourth time the sales rate has dropped in the past six months. New home sales are just 2.9 percent above August's pace of 275,000 units — the lowest level on records dating back to 1963.

Top 10 cities where home prices have improved most (or fallen least) in the past year

Many economists believe it could take three years for the industry to get back to a healthy annual rate of sales of around 600,000 homes.

The median price of a home sold in October dipped to $194,900, the lowest level since October 2003.
Building permits are down 4.2% year-over-year.

Wednesday, November 24, 2010

Mankiw: Eliminate the mortgage interest deduction

Harvard economics professor Greg Mankiw advocates eliminating the mortgage interest tax deduction:
One major tax expenditure that the Bowles-Simpson [deficit reduction] plan would curtail or eliminate is the mortgage interest deduction. Without doubt, many homeowners and the real estate industry will object. But they won’t have the merits on their side.

This subsidy to homeownership is neither economically efficient nor particularly equitable. Economists have long pointed out that tax subsidies to housing, together with the high taxes on corporations, cause too much of the economy’s capital stock to be tied up in residential structures and too little in corporate capital. This misallocation of resources results in lower productivity and reduced real wages.

Moreover, there is nothing particularly ignoble about renting that deserves the scorn of the tax code. But let’s face it: subsidizing homeowners is the same as penalizing renters. In the end, someone has to pick up the tab.

Tuesday, November 23, 2010

Real estate shadow inventory up 10% year-over-year

There is now an 8-month supply of shadow inventory:
There's a large number of homes, either already repossessed by lenders or very seriously delinquent, that are poised to be added to the already glutted regular supply of homes on the market.

This "shadow inventory" jumped 10% during the past year, to an eight-month supply at the current rate of home sales, according to a report issued Monday.

According to CoreLogic, a financial information provider, there were 2.1 million homes in this uncounted inventory as of the end of August, up from 1.9 million units 12 months earlier.

Adding the shadow inventory to the visible supply of homes on the market boosted the total housing-market supply to 6.3 million units from 6.1 million in August 2009. At the current sales rate, it would take 23 months to go through the entire visible and shadow inventory of homes — more than three times the normal rate of six to seven months.

The potential extra supply raises the risk of further home price declines, according to Mark Fleming, CoreLogic's chief economist.
For several years now, we've been hearing about how all this shadow inventory was going to hit the market and push down prices. I'm starting to think someone's crying wolf. (You remember how The Boy Who Cried Wolf ends, right?)

Monday, November 22, 2010

Glaeser: Scale back the mortgage interest deduction

Harvard University economics professor Edward Glaeser argues for scaling back the home mortgage interest tax deduction:
REDUCING THE national debt is a great test of our political system. ... Yet last week’s eminently sensible preliminary report of the bipartisan National Commission on Fiscal Responsibility and Reform seems to have brought forth not careful consideration but flights of fury. In particular, the possibility of reforming the home mortgage interest deduction has generated a torrent of ire. While one option mentioned by the report was to eliminate all tax deductions and credits, the more detailed Wyden-Gregg option is to limit the mortgage deduction to exclude second homes, home equity lines, and mortgages over $500,000. Lowering the upper limit on the home mortgage interest deduction should appeal to progressives, who want less largess for the wealthy, and to small-government conservatives, who dislike public paternalism. Unfortunately, the demons of discord seem to have prevented either group from embracing the reform.

The Democrats are haunted by a blue leviathan that calls for massive government transfers for any vaguely middle-class interest group. That monster was working full force last week as progressive pundits argued that capping the mortgage interest deduction at $500,000 would be deeply unfair to middle-class homeowners. Apparently these writers think that the middle class is full of people with million-dollar mortgages. According to the 2007 Survey of Consumer Finance, the median mortgage owed by a family in the top 10 percent of the US income distribution was $200,000. The median price of an existing home sold in September was $171,000. Research by economists James Poterba and Todd Sinai finds that even among households earning more than $250,000, the average mortgage is $300,000.

If liberals defend the home mortgage deduction as a vital bulwark for middle income Americans, then they are ignoring the fact that the home mortgage interest deduction is one of the most regressive parts of the tax code. Poterba and Sinai’s research finds that the average benefit created by the deduction for home-owning families earning over $250,000 is 10 times larger than the average benefit reaped by families earning between $40,000 and $75,000. Progressives also typically worry about global warming, and that concern should lead them to oppose any tax policy, like the mortgage interest deduction, that encourages Americans to build bigger, more energy-intensive homes. ...

Tea Party libertarians should fight the deduction, opposing any use of tax policy to try to manipulate the way we live. Why is it the government’s business to try to bribe us to buy bigger homes and take on more debt? ...

Reforming the home mortgage interest deduction is a good place for both parties to start getting serious.

Monday, November 15, 2010

Can you balance the federal budget?

Here's a graph of federal debt held by the public as a percentage of GDP, from 1970-2009:

With the exception of a few short years at the end of the Clinton administration, politicians have been unable to balance the federal budget for decades. The massive rise in U.S. national debt began under President Reagan as he cut taxes and raised defense spending. Now President Obama's National Commission on Fiscal Responsibility and Reform has proposed to reduce the budget deficit in the medium term (5 year) and balance the budget over the long run (27 years).

Can you do it? The New York Times has a fun little tool to let you try balancing the budget. I did it quite easily, in both the medium term and the long term—and then I just kept going. Through a mix of 70% spending cuts and 30% tax increases, I was able to give the U.S. a budget surplus of over $625 billion in 2030. Try it yourself. If you can't make decisions that balance the federal budget, don't get upset at politicians for being unable to do so. (Hint: Economists project that the long-term growth in federal spending comes mostly from increased entitlement spending as baby boomers enter retirement.)

Sunday, November 14, 2010

Progressives at war with the facts

In a recent New York Times column calling the United States a banana republic, Nicholas Kristof writes:
The United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.
According to the United Nations Development Programme, this is simply false. They rank the United States at #42 out of 133 countries. Nicaragua ranks #93, Venezuela ranks #65, and Guyana ranks #57.

However, Kristof's column reflects something I find quite troubling about the left's concern with "economic inequality." Modern-day progressives appear to be far more concerned with the fact that some people are rich than that some people are poor. You see this throughout Kristof's column. He never once uses the words "poor" or "poverty" in the column, however, he repeatedly complains about the rich:
In my reporting, I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie. ...

The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. ...

C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent. ...

So we face a choice. Is our economic priority the jobless, or is it zillionaires? ...

To me, we’ve reached a banana republic point where our inequality has become both economically unhealthy and morally repugnant.
So, let's clear up a few facts here. First, rich people don't make poor people poor. That would only occur if there was a only a fixed amount of wealth in a country. The truth is that economies grow over time. The rate at which they grow depends on how much a country invests in creating new businesses, expanding existing businesses, educating the public, building efficient transportation and communication networks, etc.

Second, the prospect of becoming rich is one of the main reasons people give up the security of a salaried job in order to create a new business. Starting a new business is risky. Most businesses fail in the first year. Reduce the financial incentive and you will have fewer new businesses, which in turn will create fewer high-paying jobs.

Third, taking money from the rich and redistributing it to the middle class—the progressive agenda ever since Bill Clinton took office—does nothing to help the poor. It's just a modern way of buying votes.

Fourth, Nicholas Kristof's column is misleading because it only focuses on inequality. The problem with Nicaragua, Venezuela and Guyana is not that a few people are rich, it's that the bulk of the population is poor and undereducated. According to the United Nations Development Programme, the United States ranks 9th in the world in terms of per capita income, beaten only by relatively small countries. By contrast, Nicaragua ranks #135, Venezuela ranks #71, and Guyana ranks #128. In terms of education, the United States ranks #5, compared to Nicaragua at #118, Venezuela at #104, and Guyana at #85.

On the overall United Nations Human Development Index for 2010, the United States ranks 4th in the world, beating all 27 members of the European Union.

Personally, poverty troubles me. Inequality does not.

Data source.

Thursday, November 11, 2010

How the poor successfully lift themselves out of poverty

A new paper by Anan Pawasutipaisit and Robert M. Townsend identifies how poor people in Thailand successfully lift themselves out of poverty:
The paper, "Wealth Accumulation and Factors Accounting for Success" appears in the current issue of the Journal of Econometrics. It suggests that poor people who skillfully manage their assets are especially successful in improving their net worth. The authors discovered that the ability of poor families to increase their wealth was strongly related with their rate of saving and, even more so, with their ability to create a high return on assets.

This means that those households who used their existing assets most productively were more successful at pulling themselves out of poverty. Many of the successful households reinvested their money in their small businesses and farms, suggesting that they are well aware of the source of their success. ...

The data also allowed the authors to identify traits that the most successful households tended to share in common: more highly-educated household members, a younger age of the head of household, a higher ratio of debt to assets, and a preference for formal financial markets over informal ones. But the largest source of variation in the rate of return on assets was household-specific and uncorrelated with any of these variables. This suggests there is great persistence among the most successful households.

"The data seem to show pretty conclusively that successful households are not just lucky," observes author Robert M. Townsend. "They are doing something systematic, month after month, year after year. The next step, of course, is to figure out what the associated skills and attitudes really are."
Most of the qualities identified in the research paper can probably benefit the poor anywhere in the world. When the paper cites a higher ratio of debt to assets, I assume it's referring to borrowing for capital investment, not American-style consumer debt.

A strong work ethic, a strong education ethic, a strong frugality ethic, and a strong entrepreneurial ethic are essential to improving one's economic well-being. Ethic is a key word here. Parents need to teach their children that these qualities are important, and they need to live it themselves as well.

The full paper can be found here.

Tuesday, November 9, 2010

Graph: Taylor Rule vs. Mankiw Rule vs. Fed Funds Rate

This graph compares the Taylor Rule and the Mankiw Rule to the effective Federal Funds Rate. Click on the image to see an enlarged version.

The Taylor Rule and the Mankiw Rule intend to proscribe effective monetary policy, while the Fed Funds Rate is what the Federal Reserve actually did, regardless of whether is was helpful or harmful.

Monday, November 8, 2010

FT: QE2 is about pushing up asset prices

Economist Gavyn Davies, writing for The Financial Times, says this second round of quantitative easing is about pushing up asset prices:
Clearly, the fuss is mostly about asset prices. ... which may encourage the markets to believe that there is a “Bernanke put” underlying the equity market. Almost certainly, the Fed is happy to see rises in equity prices and declines in the dollar, despite warnings that this stance may induce bubbles to develop in the US and overseas.

It is interesting to review market behaviour since Mr Bernanke’s speech at Jackson Hole on 27 August, which indicated that QE2 might be around the corner. Bond yields have hardly moved since that speech, but inflation expectations within the TIPS market have risen by over 0.5 per cent. And commodity and equity prices have risen sharply, by 16 per cent and 11 per cent respectively. These developments are all consistent with a belief that the Fed is intent on reflating the US economy, and that it will succeed in doing so.

Probably the oldest piece of advice in asset management is “don’t fight the Fed”. It usually works. If the economy grows moderately in coming months, while the Fed steadily injects money into the financial system, risk assets could benefit further.

Friday, November 5, 2010

Is the Fed blowing new bubbles?

The Federal Reserve is beginning a new round of quantitative easing, printing money to buy intermediate- and long-term bonds, thus increasing the money supply and lowering intermediate- and long-term interest rates.

This is different from what the Fed normally does to stimulate the economy. Normally it prints money to buy short-term bonds. But, since short-term interest rates are already near zero, the Fed has to take the riskier action of buying longer-term bonds if it wants to stimulate the economy.

Harvard economics professor Martin Feldstein, President Emeritus of the National Bureau of Economic Research, warns that this is dangerous and may blow new bubbles:
The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy.

Under the label of QE, the Fed will buy long-term government bonds, perhaps one trillion dollars or more, adding an equal amount of cash to the economy and to banks’ excess reserves. Expectation of this has lowered long-term interest rates, depressed the dollar’s international value, bid up the price of commodities and farm land and raised share prices.

Like all bubbles, these exaggerated increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities. These risks should be clear after the recent crisis driven by the bursting of asset price bubbles. Although the specific asset prices that are now rising are different from last time, the possibility of damaging declines when bubbles burst is worryingly similar. ...

The truth is there is little more that the Fed can do to raise economic activity. What is required is action by the president and Congress...
It sounds to me like Feldstein is saying The Onion was right.

As for other notable economists' thoughts on the Fed's actions, John Taylor is opposed and Paul Krugman is ambivalent.