Month: June 2004

Are we in a housing bubble?

Ed Leamer says yes, Brad DeLong takes issue. Here is a wide array of writings on the topic.

Housing has never, to me, seemed like an especially bubbly asset. You use it every day, most of the market is not driven by speculation, and the transactions costs of asset churning are high. Furthermore the rental alternative would appear to keep prices somewhat in line with fundamentals.

A deeper question is what makes for a bubble, ex ante. The “cheap” definition of a bubble is to wait for the price to fall, and then declare that the earlier, higher price was a bubble. We can throw out this cheap definition, but then we are stuck in the vagaries of modal logic. “Hey, I just knew that price had to fall…” Not very convincing. I am convinced that bubbles are real, I am simply unable to define them.

One reader asked for investment advice about the real estate market; this is hardly my forte. Nonetheless I will offer the following: If you are investing in multiple real estate purchases, as opposed to just buying a home, ask yourself the following question? If a “dirty bomb” went off in my area, would I still be a wealthy man?

Is Medicare progressive in its impact?

Maybe not.

If just one assumption about Medicare’s distributional effects would seem to be safe, it would be that the system results in substantial progressive redistribution, or transfers from people who on a lifetime basis are high-earners to those who are low-earners. After all, everyone gets the same insurance coverage upon retirement, but during your working years you pay a flat rate tax, with the result that high-earners pay more.

Think again. Here are some reasons why wealthier people use Medicare more:

1. Wealthier people demand more health care and greater treatment intensity.

2. Wealthier people tend to live longer.

3. Wealthier people don’t mind Medicare copayments as much.

4. Wealthier people are more likely to live in or near major cities, where access to care is greater.

A variety of studies offer mixed results, but in general do not support the view that Medicare is progressive in its effects. Note, however, that these studies do not consider the distributional impacts of the recent Bush drug prescription bill.

The above is taken from Daniel Shaviro’s Who Should Pay for Medicare?, an excellent public policy study. You’ll be hearing more about this book soon.

My observations: The correct notion of progressivity would account for the value of benefits received, not just dollars spent. Of course this is harder to measure. In the meantime, the result suggests that partial privatization of Medicare, as would allow the wealthy to opt out, would not create an (additional) fiscal crisis for the rest of the system. That being said, if the wealthy are gaining on net, don’t be surprised if privatization doesn’t get off the ground. Furthermore the medical benefits of privatization will be correspondingly limited. The main benefit of privatization would be to stop Congress from spending the money in the mythical “lockbox.”

The economics of storage

Data storage is becoming cheaper at rapid rates. This is one reason why I don’t ever expect a totally converged information superhighway, supplying our television, computer, music listening, etc., all in one service. Why obsess over your piping when you can have milk delivered cheaply at your doorstep? Netflix and Google’s Gmail, rather than Verizon, may represent our cultural future. Data storage and delivery also tend to be less regulated than centralized piping, plus they limit natural monopoly problems. Under this alternative model, I might receive “cultural disks” in the mail, every month or week, and decide what on those disks I am willing to pay for. Yes there will be hackers but we will be rich, the discs will be cheap and convenient, and they will offer ancillary services of organization and presentation. I can hardly wait, except now I remember I don’t even have time for the current menu of cultural offerings.

Addendum: One reader sent me this data set on the falling price storage on hard drives.

Spam revenge

Are you tired of hearing from deposed, desperate Nigerians seeking a bank account in which to deposit their funds? Some people are striking back:

…an ad hoc militia of self-styled counterscammers on several continents is taking the fight directly to the thieves. Aiming to outwit the swindlers, they invent elaborate and often outrageous identities (Venus de Milo, Lord Vader) under which they engage the con men, trying to humiliate them and, more important, waste the grifters’ time and resources.

The possibilities are endless:

…a fraud baiter posing as one Pierpont Emanuel Weaver, a wealthy businessman, appeared to persuade a con man in Ghana in 2002 to send almost $100 worth of gold to Indiana – for “testing purposes as my chemist requires” – after being asked to put up $1.8 million for a share in a gold fortune. In other cases, swindlers are tricked into posing for pictures holding self-mocking signs, pictures then posted online. Or they are led to travel hundreds of miles to pick up a payment, only to come up empty-handed.

A 47-year-old manufacturing executive in Lincoln, Neb., said he had been engaged in such pranks for almost three years. “I’ve had many, many good laughs at their expense, and have spent nothing but time,” he said. “They have spent countless hours creating fake documents, obtaining photos of themselves holding funny signs, running to the Western Union miles away from where they live to obtain money which I never actually sent, and printing out counterfeit checks to send me.” As for his motivation, he said, “Hopefully, along the way, I’ve diverted enough of their time and resources to keep them from successfully scamming at least one hapless (albeit, most likely, greedy) victim.”

Here is the full story (NYTimes). Here is a website detailing Internet scams, and how they have been stopped. Here is one con man-vigilante exchange, which becomes increasingly humorous. By the end you will see why the scammer is labeled the “world’s rudest investment advisor.”

One question I have: Far be it for me to challenge the voluntary and welfare-enhancing provision of a public good. Nonetheless I cannot help but ask what are the motives of these vigilantes? Is this their idea of fun? Would they be equally keen to aid the vaccination of African children? Part of me is happy that both sides are kept busy with these shenanigans.

Popular culture update

Dodgeball is a genuinely funny movie, if not always in the best of taste. Ben Stiller shows once again that he is best when playing the villain.

Lakers center Shaquille O’Neal has asked to be traded. He is upset that the Lakers appear to be making Kobe Bryant the center of their team.

Oprah has selected Anna Karenina for her book club; apparently has retitled the book Anna Karenina (Oprah’s Book Club).

After a five-year trial period, the Himalayan fiefdom of Bhutan may ban TV once again. Wrestling programs and pornography have come under particular criticism.

Do you love Dad more than Mom?

Sons and daughters plan to spend just $86 on their fathers this year, according to a survey by the National Retail Federation. That’s $12 less than the $98 they spent on their mothers on Mother’s Day last month…

But if you interpret these figures in per hour of labor terms, I would say that Mom is greatly underappreciated. And let’s not forget that these expenditures, in reality, often come from Dad rather than from the kids.

What’s the bad news for Dad?

This year the average family spent $13 less on Dad than last year. It gets worse:

While nearly 81 percent of Americans celebrated Mother’s Day, only 72 percent plan to celebrate Father’s Day tomorrow [today], according to the survey of 6,899 persons.

Here is the full story.

What are economists learning about religion?

Harvard economist Robert Barro has been engaged in a major project on economics and religion. Here is an interview, outlining what he has learned. Here are some results:

1. Religious participation is negatively correlated with economic growth.

2. For the most part religious belief (as opposed to participation) is not correlated with economic growth. Belief in hell is positively correlated with growth, however.

3. Religious pluralism makes people more religious. In other words, the more options available, the more likely that religion will be found appealing.

4. As a country becomes wealthier, its people tend to become less religious (the U.S. is an outlier here; we are remarkably religious for our level of wealth).

Here is the part that surprised me most:

We look at the consequences of having an established state religion. On net, we find that that is actually positive, both for church attendance and for religious beliefs. To some extent, that goes against what Adam Smith said. Smith stressed that established religion would promote monopoly, poor service, and decreased service attendance. He particularly inferred that from looking at the Anglican Church in England.

We find, however, that the net relationship is actually positive, and we think that is basically because state religion tends to be accompanied by the state subsidizing religious activity in various ways. I think an economist, particularly Adam Smith, would generally accept the idea that something that is subsidized will tend to occur more often than something that isn’t. It’s the same as saying that something that is taxed will tend to occur less often.

Here is Barro’s home page, with links to many of his writings. Here is a plug for my colleague, Laurence Iannaccone, who works on related issues and has been conferring with Barro.

Thanks to the ever-excellent for the link.

Addendum: Here is a recent Barro lecture, thanks to Andrew Grossman for the tip.

The rise of the Chinese consumer

The Chinese are rapidly becoming world-class shoppers:

Luxury-goods firms are thus becoming wildly excited about the possibilities–in China and beyond. Armani plans to open 20-30 new stores on the mainland by 2008. Prada will invest $40m in China in the next two years, and almost double the number of stores there this year to 15. Louis Vuitton will open its first full-range shop on the mainland in Shanghai in September, and will have 13 stores by year end.

As the Chinese travel more, they are broadening not only their minds but also the range of luxury goods they come into contact with. Once abroad, their favourite activity seems to be shopping. During last month’s Golden Week holiday, around 380,000 mainland tourists visited Hong Kong in just ten days, almost 80% up on 2002. (Last year, SARS kept numbers down.) Mainlanders spend more per person in Hong Kong than any other tourists. From this summer they can travel as individuals to 12 of 15 EU countries (but not Britain, Ireland or Denmark).

“The Chinese go to Paris, stay at two- star hotels, eat cheap Chinese food and spend all their time shopping,” says a luxury-firm executive with glee. Christopher Zanardi-Landi, general manager in China for Louis Vuitton, says that the industry is preparing for “a huge wave” of Chinese shoppers. While they have hitherto catered mainly to Japanese tourists, “luxury stores in Paris are starting to employ Mandarin-speaking assistants,” he says.

But for now, Hong Kong remains the favoured destination for mainlanders. That is why so many luxury stores are opening in Hong Kong. In the past three months, Zegna, Ferragamo, Louis Vuitton, Prada and Dior (among others)ve opened in bigger and better-designed spaces. Hong Kong’s property developers are delighted.

Here is the full story. Here is the previous installment of “China Facts.”

Kidney swaps II

The Wall Street Journal reports (subs. required) that the kidney swap idea I wrote about earlier is beginning to be implemented. Here are they key points:

Last year, 43% of kidneys transplanted in the U.S. came from living donors, up from 28% a decade ago.

But a biological barrier often blocks a transplant from a relative. In about a third of all would-be pairs, blood types are incompatible. In others, the sick person has antibodies that can initiate a rejection of the donated organ. It’s heartbreaking “to have the treasure of the live donor and then have that not go forward because of a biological obstacle,” says Massachusetts General Hospital transplant surgeon Francis DelMonico.

Occasionally, transplant centers spot a way out: One New England father with blood type A couldn’t donate a kidney to his daughter with blood type B. So he gave a kidney to a teenager with blood type A, and the teenager’s sister gave a kidney for the man’s daughter.

Such swaps, however, typically occur only when happenstance alerts surgeons to the possibility. Economist Alvin Roth and co-authors have devised an algorithm, however, that computes all the possible swaps and which is incentive-compatible.

…when Dr. Saidman gave the economists details on 45 pairs in which the would-be donor was unable to give a kidney to the intended recipient. Even though each of the 45 had a donor willing to spare a kidney, all were stuck waiting for the right person to die. With swaps involving two kidneys, the economists found, eight transplants were possible. If swaps involving three kidneys were possible, then 11 transplants were possible.

Addendum: Alert readers will note that kidney swaps are quite similar to organ clubs an idea for saving lives that has been implemented by Lifesharers.

Trade as a substitute for migration: Outsourcing update

New Border Patrol uniforms, ordered in the wake of the agency’s transfer last year to the Department of Homeland Security, arrived this month and some agents are not very happy: The new uniforms were “Made in Mexico.”

How many of the people who made those uniforms would have otherwise migrated? Has the Border Patrol found at least one (partial) solution that works? Here is the full story.

Think again!

Interested in “seductive math problems for the modern mind”? Every day Jan Nordgreen, a Norwegian living in Bolivia, posts a new puzzle on his elegant and fun blog, Think Again!

Here is a recent challenge:

A party consists of three couples. At the end of the party one of the husbands asks the others how many new acquaintances they made during the evening. Everybody gives a different answer. What did his wife answer?

Why do Asian central banks buy so many dollars?

Why exactly are the Japanese and Chinese foreign banks buying so many U.S. dollar-denominated securities? And if such purchases are so important in keeping our economy afloat, ought we not try to figure out whether they are likely to stop?

Foreign central banks are on a spending spree. As recently as 2001, central banks bought just $10.7 billion in Treasury securities on a net basis. But their net purchases have risen dramatically: to $43.1 billion in 2002 and $128.5 billion in 2003.

With each passing quarter, foreigners have become more significant consumers of U.S. government debt. In 2002, non-Americans accounted for about half of net purchases of Treasury securities. But in the first quarter of 2004 they accounted for 150 percent! That is–the rest of the world bought a net $679.8 billion in Treasury securities while U.S. brokers and dealers sold a net $202.7 billion.

I can think of a few theories:

1. They think dollars are a good investment. Well, at one level this must be true tautologically. But why do those two central banks have such a special attachment to this investment vehicle?

2. They think they will receive geopolitical favors in return. I view this as a relatively optimistic scenario. It suggests, among other things, that the game can continue for a long time. Mutual gains from trade have a strong attraction. It also would mean that American “imperialism” has a lower economic cost than is usually believed. It leads countries to want to buy our Treasury securities as a favor to us. On the darker side, it means that our fiscal irresponsibility has a higher cost than is usually believed. It forces us to play numerous games on the international stage.

3. China and Japan want to keep the value of the yuan and yen low, as part of a mercantilist export-promotion strategy. I take this to be the standard wisdom. I”m certainly not dismissing it, but I do have a few questions. Aren’t there easier ways to subsidize exports? Why are exporters the dominant interest group here? Isn’t a country wealthier when its currency is stronger in real terms?

4. They are building up an endowment, for the same mix of self-evident and obscure reasons that universities do. It is a symbol of status, stability, and commitment to the long haul. It helps them be taken seriously as countries.

5. They have a stake in American prosperity. They’re willing to hold an inferior portfolio if it keeps the U.S. — obviously a major market — fat, healthy and addicted to imports.

6. They are incredibly risk-averse. What safer investment could you find?

7. They are just plain, flat-out stupid. I call this the uh-oh scenario. They won’t stay stupid forever.

I suspect there is truth in all seven hypotheses.

This Slate article offers some useful background and the above quotation. And here is some (numerically overstated) good news:

The day may come when the Chinese government stops being the lender of last resort to America, but if it does stop, there are a billion or so Chinese citizens ready to take up the cause. Given the legal right to do so, they would yank deposits out of the Chinese banking system and invest in U.S. securities.

Addendum: If I look at my own portfolio, I am doing much the same thing. I believe that most assets are overpriced and I don’t know where else to put my money.