Month: May 2012

Maybe a Walmart near your home isn’t so bad after all

From Devin G. Pope and Jaren C. Pope:

Walmart often faces strong local opposition when trying to build a new store. Opponents often claim that Walmart lowers nearby housing prices. In this study we use over one million housing transactions located near 159 Walmarts that opened between 2000 and 2006 to test if the opening of a Walmart does indeed lower housing prices. Using a difference-in-differences specification, our estimates suggest that a new Walmart store actually increases housing prices by between 2 and 3 percent for houses located within 0.5 miles of the store and by 1 to 2 percent for houses located between 0.5 and 1 mile.

Does anyone know of an ungated copy of the paper?

What views can you hold about Spain?

Choose A or B:

A: Spain is in a recession, which will end.  For instance, this story reports: “The OECD on Tuesday predicted more pain for Spain over the next two years when the economy will remain mired in recession with a quarter of the population out of work.”

B: Spain is in a self-cannibalizing downward spiral, as Greece was and is.  It will not end until there is, at the bottom, an absolute and total crash.

I choose B, noting that I wrote most of this post a few days ago and already A does not appear to be a serious answer.  You add up the required deleveraging, the provincial debts, the shaky state of the banks, the shaky accounting at the banks, the productivity problems, the European-wide political uncertainty, self-defeating fiscal adjustments, the broken real estate lending technology, once-again spiraling yields, broader deflationary pressures, unsatisfactory ngdp performance, the drying up of credit for small and mid-size businesses, disappearance of quality collateral, and the de-europeanisation of the capital markets, and you have B.  Oops, I forget to mention the massive proliferation of have-to-pay-them-back-first governmental senior debt claims; why wait in that line?

The fact that you are not used to seeing the credit institutions of an advanced economy unravel before your eyes — “going entropic” — should not blind you to this reality.  Nothing new bad has to happen for Spain simply to go “pop,” rather the ticking of the clock will suffice.

Note that a sufficiently large bailout plan, starting with debt forgiveness and reflation, could convert B to A, but right now we are in B.

If you chose A, you think life will be (relatively) easy.  I have spoken with numerous intelligent Europeans who believe in A, but because — in my view — they cannot grasp the terribleness of the alternatives, or the magnitude of the error of their previous attachment to the euro, not because they have strong macroeconomic arguments for pending recovery and capital market survival.

If you chose B, there are three more options:

B1: It is a political economy problem.  If the Spanish could simply institute the right policies, whatever that might mean, they could convert the destructive spiral into a mere recession.

B2: It is fundamentally a problem of aggregate demand and credit contraction.  Without a European-level major bailout and stimulus, Spain will go splat.  Yet sufficient stimulus could bring Spain back to its PPF frontier relatively easily.

B3: There is a major problem of aggregate demand and credit contraction, and a political economy problem, and this is paired with multiple equilibria.  Investors are judging whether Spain is still a major European economic force, as they had thought for a while, but perhaps had not thought back in 1963.  The equilibrium which obtains will depend upon the Spanish response to the crisis, but the best bet is to expect Spain to revert to something, in economic terms, resembling 1999 + Facebook.  The institutional quality and level of trust in Spain will receive a semi-permanent downgrade, most of all in the eyes of Spaniards, and it will look very much like an output gap but will not be remediable through traditional macro remedies.

The real euro pessimists are the multiple equilibria people.

Germany and Austria also have multiple equilibria, but those equilibria are not so far apart.  For Greece the multiple equilibria are extreme — “Balkans nation,” or “European nation”?  Or should I say were extreme?; probably we are down to one of those options at this point.

For Spain, if a truly major bailout does not arrive, the roller coaster ride down will be extreme and terrifying.  But still, we must put this in perspective.  I was in Spain in 1999 and it was very nice, the large fiction sections of the bookstores most of all, the Basque restaurants too.

I am arriving in Madrid as you read this, perhaps I will have more to say.

Assorted links

1. The global trade in meteorites.

2. Offshoring pregnancy and birth to India, and helping workers relocate.

3. The chess player who outsmarted JPMorgan.

4. What happens when a company tries truly transparent pricing?  It is an interesting link.

5. 25 (!) “Propuestas” by XSiM, how to fix the Spanish crisis, in Spanish, how many of the twenty-five do they need?  Consider this one: “19. Meritocracia.

Bankruptcy tourism

A solicitor in Leicester has helped Irish clients escape more than €1bn (£798m) of debt by taking advantage of a booming trade in “bankruptcy tourism”.

Data seen by the Guardian reveal Steve Thatcher, who runs the new advisory service www.irishbankruptcyuk.com boasts at least 55 clients in the process of clearing some €1.2bn by using UK courts to wipe out loans taken out in the republic. One property speculator wrote off €150m during a 35-second court appearance.

While bankrupts in the UK face only one year in financial purdah, in Ireland it is 12 years – despite promises of reform from the Dublin government.

Such is the stigma still associated with bankruptcy in Ireland that “Michael” and “Mary” are unwilling to give their real names after they used the UK courts to write off nearly €320,000 of negative equity and other debts. They fear that in Ireland they could be blacklisted from jobs if potential employers knew they were bankrupts.

Here is more, and for the link I thank Philip Hegarty.

The blue bond/red bond proposal

The model by Mr. Delpla and Mr. von Weizsäcker , for instance, would let countries put some of their debt — equal to no more than 60 percent of gross domestic product — into so-called blue bonds issued by all members. These would presumably carry a very low interest rate.

The rest — the red bonds — would remain the responsibility of individual countries and would probably carry much higher interest rates.

Countries would need approval from a central committee to issue blue bonds, and could do it only if they followed responsible economic and budgetary policies. Germany would effectively have veto power.

“If you behave well, you have access to blue debt,” Mr. Delpla said. “If you start to behave like Berlusconi, you will not have access to blue debt, and the price of red debt will go up.” He was referring to the former Italian prime minister, Silvio Berlusconi, whose policies were blamed for much of Italy’s current economic and debt woes.

Thus Spain and Italy would still feel acute pressure to improve the way their economies function and to get better control of public spending. One big advantage of the proposal, Mr. Delpla said, is that it could be put into action quickly without a major restructuring of the European Union.

That is from Paul Geitner, here is more.  What are the problems with this?:

1. GDP figures will be manipulated, to allow for the issuance of more guaranteed debt.

2. The key is guaranteeing the banks and their deposits, at reasonable cross-border cost.  This doesn’t accomplish that.

3. Presumably a country has to pay back its joint bonds first, otherwise it is too easy to pass the buck on those and just pay back the national bonds.  That makes the purely national bonds subordinated debt and may raise rather than lower their risk.  Real private sector lending is already becoming subordinate to an unworkable degree, given all the “first in line” public lenders involved.

4. Germany still ends up with its finger on the “send you (and me) to doom” trigger, which already isn’t working out in the Greek situation.  If Spain or Italy is approaching insolvency, can the Germans really withdraw credit?  Didn’t the ECB just lend over a trillion euros, starting December 2012?  How well is that going?  Is Germany finding it easy to say “nichts mehr!”, or is the pressure for ever-greater bailouts integration?  Why should the Germans let themselves be led further down that gangplank?  Why not just call the plan “Germany commits to no more bailouts, not ever, ever again” and cross your fingers behind your back?

What else?

The real inflation problem

Competitors are said to pump air to deliberately inflate the udders before sealing the teats with superglue to stop the air or milk leaking out. The procedure gives the cattle the appearance of having full udders, an attribute believed to be desirable in show cattle. The practice, which leaves cows in “severe discomfort”, is understood to be an attempt to win agricultural prizes for their animals. Champion animals can fetch up to £100,000 at auction and are highly prized for breeding. The RSCPA has promised to investigate complaints, although no prosecutions have yet taken place.

Here is more, courtesy of Rahul.

The culture that is Washington, D.C.

The article is here, or try this link, and it is scary.  Here is perhaps the worst bit:

Aside from its wealth, the single defining feature of über-Washington is its youth. Most of the people who have moved to Washington since 2006 have been under 35; the region has the highest ­percentage of 25-to-34-year-olds in the U.S. “We’re a mecca for young people,” Fuller says. One recent arrival says word has gotten out to new graduates that Washington is where the work is. “It’s a place where a ­liberal-arts major can still get a job,” she says, “because you don’t need a particular skill.”

Every paragraph in the article is terrifying.

For the pointer I thank Chug.

A Power Vacuum is Killing the Eurozone

That is the title of my latest column, here is one excerpt:

We thus face the danger that the euro, the world’s No. 2 reserve currency, could implode.  Such an event wouldn’t be just another depreciation or collapse of a currency peg; instead, it would mean that one of the world’s major economic units doesn’t work as currently constituted.

We are realizing just how much international economic order depends on the role of a dominant country — sometimes known as a hegemon — that sets clear rules and accepts some responsibility for the consequences.  For historical reasons, Germany isn’t up to playing the role formerly held by Britain and, to some extent, still held today by the United States.  (But when it comes to the euro zone, the United States is on the sidelines.)

THERE appears to be a power vacuum, and the implications are alarming. We may be entering a new world where international cooperative arrangements, in environmental areas as well as finance, are commonly recognized as impossible.  If the core European nations cannot coordinate effectively, what can we expect in dealings with China, Russia and other countries that have less of a common background and understanding?

I consider this a big deal, even beyond its immediate macroeconomic ramifications, which of course are a big deal too.

There is a second, more technical point too:

…some of the banking systems in the periphery nations may be too broken for monetary policy to take hold.  Imagine the European Central Bank trying to infuse new money and credit into Spain, while bank deposits move quickly to Germany, Switzerland and other safer places.  Again, why would anyone want to keep money in the bank of a fiscally troubled nation?  That loss of confidence will not be easily repaired.

At this point, probably euro-wide deposit insurance is needed before monetary policy can help in Greece or Spain (that wasn’t true two years ago).  Yet creating a eurozone-guaranteed safe asset in those economies ultimately boils down to the eurobond idea, which of course the Germans are reluctant to do.

Here is a related Op-Ed from Mark Mazower, focusing on the theme of a collapse of European and international cooperation.  Here is a good article on why plans for tighter political union in Europe will not easily work.  There is talk the UK will cut off migrants if the euro collapses.  Switzerland may introduce capital controls.  What else?  I do not see this turning out well.

Falling public investment in the United Kingdom

Paul Krugman draws our attention to the following chart (via Portes):

Maybe that really is worrisome.  Still, if I look at the longer run chart — which is on p.14 from this pdf — sorry it will not reproduce — I start thinking that the matter is more complex.  After all, in the early 1970s the figure for public investment was well over thirty billion pounds, and it is mostly falling sharply except for the late 1980s and very early 1990s.  In the year 2000 it ends up at around five billion pounds, about one sixth the initial level.  Yet the 1970s were pretty awful times for Great Britain, with pretty awful economic policies.

Why is public sector investment falling so much over the longer term?  Mostly it is the decline in the number of public corporations, a healthy development if you ask me.  Check out Figure 2 on p.15 of the same paper, noting the difference between net and gross investment.  You also will see that changes in local government have been more important than changes at the national level.

If you read this paper, which runs to 2000 or so, you will see that public investment in health services has been plummeting for a long time, well before Cameron or “austerity,” defense spending seems to be included in these figures, and a lot of transport is not included in these numbers at all.  I am happy to take corrections if things are done differently now.

Now what is the recent decline in public investment due to?  I do not know, and in part I am asking for your help.  I really am willing to believe that the United Kingdom is not investing enough in its future, including in science and education, but we haven’t yet gotten to the bottom of this matter.  How much of that decline in the first graph is simply due to defense spending cuts and a shifting composition of expenditure for the national health care service, as higher service bills crowd out investment?  How much is driven by changes in the housing market?  (Here is a good historical source on changes in public housing policy over the longer term.)  How do the recent declines in public investment compare to the longer term trend?  How much is driven by a change in the gross rather than the net?

By the way, to cite a separate but related debate, to the extent immediate health care expenditures are pushing out health care investment, should that really count as “austerity”?  I don’t think so, however mistaken such a policy may be, and thus I don’t see why “net public investment” is the proper metric for the short-run stance of fiscal policy (for that matter the “gross” figure may be more appropriate for short-run macro).

Inquiring minds wish to know.  I hope that inquiring British minds wish to know too, or better yet already do know.  I will gladly reproduce the best of what we learn from the comments.

Addendum: Here is a published data series.  I am not sure I understand the notation, but my initial reading seems to suggest that current data are not out of line with the longer-term trend, including under Labour.

Which are the undervalued countries these days?

With the eurozone falling apart, and growth in China, India, and Brazil slowing down, which countries remain undervalued?  I have a few — and I stress that word few — selections:

1. Philippines.  Their rate of growth has been picking up as of late, they have plenty of “low hanging fruit,” they don’t rely too heavily on durable goods exports to the wealthier countries (that’s the bad news too, of course), and sooner or later they are due for a burst of investor attention.  I don’t wish to oversell this one, but we are talking “undervalued” here, not “the next Singapore.”  One danger is 14.9% of their exports going to China, another is bad institutions.  Still, articles about this country use the phrase “bucking global trends.”

2. Pakistan.  Most of all, the bad news here is already on the table.  As far as the economic data, here is a quick review of where they are at.  I’m not claiming it is impressive.  Still, all they need is a bit of peace and order to prosper more, and while I am not predicting that in an absolute sense, it is mostly uncorrelated with the economic performances of the wealthier countries.  Think of the country as a kind of risk-free asset, in the covariance sense that is.  Keep in mind that until the late 1980s they usually had higher rates of economic growth than India did.  They stand a good chance of playing catch-up, especially if they are willing to accept a subordinate place in India’s economic orbit.  Which right now they are not, but arguably that is the future trend, and indeed Bangladesh has made exactly that leap in terms of economic self-image.

3. Mexico.  I’ll be writing on this more elsewhere, so I’ll save up my arguments for now.  One point is that China’s slowdown, and the relative economic stability of the U.S., both augur well for the Mexican economy.

4. Gujarat.  Just pretend it is a country, after all it has more than fifty million people.  They have averaged more than 10 percent growth for the last seven years.

You can make a case for Ghana and Rwanda as well, mostly because of their satisfactory record in agricultural productivity.  Most other places are due for a fall.

Addendum: Via Michael Clemens, here is a related article.  I view Turkey and Poland as “capitalized,” however.

“Getting a good meal in D.C. requires some ruthless economics”

This piece is by me, in The Washington Post.  Here is one bit:

The key is to hit these restaurants in the “sweet spot” of their cycle of rise and fall. At any point in time Washington probably has five to 10 excellent restaurants; they just don’t last very long at their highest levels of quality.

Here’s how it works. A new chef opens a place or a well-known chef comes to town and starts up a branch. Good reviews are essential to get the place off the ground, and so they pull out all stops to make the opening three months, or six months, special. And it works. In today’s world of food blogs, Twitter and texting, the word gets out quickly.

…Through information technology, we have speeded up the cycle of the rise and fall of a restaurant. Once these places become popular, their obsession with quality slacks off. They become socializing scenes, the bars fill up with beautiful women (which attracts male diners uncritically), and they become established as business and power broker spots. Their audiences become automatic. The transients of Washington hear about where their friends are going, but they are less likely to know about the hidden gem patronized by the guy who has been hanging around for 23 years, and that in turn means those gems are less likely to exist in the first place.

In economic terms, think of this as a quest for the thick market externalities.  Search and monitoring are most intense in the early stages of a restaurant’s life, and so that is the best time to go.  There is an analogy in music: Bob Dylan and Chuck Berry do not always give the very best concerts, because they do not have to.  You may or may not like up-and-coming bands, but at least they will be trying very hard.

The full article is here.