Category: Economics

When were U.S. home prices at their worst?

That of course is only one metric, and it focuses on flows rather than homes as an asset.  It nonetheless puts a number of matters in perspective.  Here it is in words:

1981 was the most unaffordable year for those who need a mortgage, with annual payments consuming a whopping 52% of their income. For comparison, in 2022 mortgage payments require 27% and the absolute lowest point is back in 1963 when only 18% was required. In 2006 (at the peak of the housing bubble), families would need 30% of their income. Thus we can confidently say that 2022 is so far not the worst year in history for those who can’t afford to buy a house without a loan.

Canada and New Zealand seem to be the truly scary places.  Here is the full essay by Nikita Sokolsky.

“If economists are so smart, why aren’t they rich?”

Peter Coy (NYT) considers a few hypotheses.  My take here is pretty simple.  Here are three of the main ways to beat market returns:

1. Build a new product and sell it successfully.

2. Assemble and maintain an especially talented team of quants.  (It is a separate but still relevant question at what scale you can do this and thus how rich you can become.)

3. “See” something about the market, at least for a limited period of time, that other people do not and invest accordingly.  That might be falling interest rates, the rise of consumer tech, or the persistence of low inflation (all until recently!).  Note that #3 requires you to have some money in the first place, and for your run to be long enough that you truly become rich.

Putting aside generic demographic factors, there is no particular reason to expect #1 or #2 to be much correlated with expertise in economics.

You might think that #3 is somewhat correlated with expertise in economics, but I don’t think it is very much.  You can pile up a bunch of ancillary reasons why economists might not be practically oriented enough to succeed at #3.  But even putting all that aside, economic theories of “regime change” just aren’t very good!  (It is comparative statics that we excel at, but that knowledge can be replicated and sold cheaply to the rest of the investment community, if it turns out to be valuable.)  So knowing economics won’t correlate much with success at strategy #3.  And some of those non-economists who succeed at #3 are just lucky anyway.

And that is why, dear reader, most economists are not very rich.  You are correct in downgrading their intelligence for these reasons, though there are still some regards in which they are quite smart, such as having ability at hypothesis testing, or perhaps having the ability to ask very good and penetrating questions about economic issues.

That was then, this is now, cryptocurrency edition

Nouriel Roubini, a blockchain basher who famously called Bitcoin “the mother of all bubbles,” is working to develop a suite of financial products including a tokenized asset intended to act as a “more resilient dollar” in the face of higher inflation, climate change and civil unrest.

Roubini, nicknamed “Dr. Doom” for his bearish views, sees room for an asset-backed digital coin that could help protect against higher prices and benefit from soaring demand for land and commodities, as well as a loss of confidence in fiat currencies. He’s working with Dubai-based Atlas Capital Team LP, which he joined two years ago as co-founder and chief economist, to create the new products.

In doing so, Roubini is tapping into growing concerns over the pace of inflation as well as speculation about the longer-term outlook for the dollar, with prominent financial voices including Bridgewater Associates LP’s Ray Dalio and Credit Suisse AG strategist Zoltan Pozsar having argued the U.S. currency risks gradually losing its reserve status.

The greenback’s lofty position could be in jeopardy as the U.S. “prints too much money and adversaries start de-dollarizing,” Roubini said in an interview. “We recognized that America’s dollar reserve currency could be at risk and are working to create a new instrument that’s effectively a more resilient dollar.”

Unlike many cryptocurrencies, Roubini stresses that the coin would be backed by real assets — a mix of short-term U.S. Treasuries, gold and U.S. property (in the form of Real Estate Investment Trusts, or Reits) that’s expected to be less affected by climate change.

Here is more from Bloomberg.  Here are earlier writings of relevance.  I’m all for new business ventures, but perhaps he has the inflation timing wrong on this one?  In any case, welcome Nouriel to the Austrian School of Economics!

Do welfare payments limit crime?

The effect of SSI removal on criminal justice involvement persists more than two decades later, even as the effect of removal on contemporaneous SSI receipt diminishes. In response to SSI removal, youth are twice as likely to be charged with an illicit income-generating offense than they are to maintain steady employment at $15,000/year in the labor market. As a result of these charges, the annual likelihood of incarceration increases by a statistically significant 60% in the two decades following SSI removal. The costs to taxpayers of enforcement and incarceration from SSI removal are so high that they nearly eliminate the savings to taxpayers from reduced SSI benefits.


The increase in charges is concentrated in offenses for which income generation is a primary motivation (60% increase), especially theft, burglary, fraud/forgery, and prostitution.

That is from a new NBER working paper by Manasi Deshpande and Michael G. Mueller-Smith.

The LGBTQ+ earnings gap

There is a new paper on this topic, here is the abstract:

This article provides recent estimates of earnings and mental health for sexual and gender minority young adults in the United States. Using data from a nationally representative sample of bachelor’s degree recipients, I find a significant earnings and mental health gap between self-identified LGBTQ+ and comparable heterosexual cisgender graduates. On average, sexual and gender minorities experience 22% lower earnings ten years after graduation. About half of this gap can be attributed to LGBTQ+ graduates being less likely to complete a high-paying major and work in a high-paying occupation (e.g., STEM and business). In addition, LGBTQ+ graduates are more than twice more likely to report having a mental illness. I then analyze the role of sexual orientation concealment and find a more pronounced earnings and mental health gap for closeted graduates.

That is from Marc Folch at the University of Chicago.

I Hate Paper Straws!

I am interviewed by James Pethokoukis at his substack Faster, Please! Here’s one Q&A:

JP: American political debates are generally more interested in redistribution than long-term investment for future innovation. What are the incentives creating that problem and can they be fixed?

A big part of the incentive problem is that future people don’t have the vote. Future residents don’t have the vote, so we prevent building which placates the fears of current homeowners but prevents future residents from moving in. Future patients don’t have the vote, so we regulate drug prices at the expense of future new drug innovations and so forth. This has always been true, of course, but culture can be a solution to otherwise tough-to-solve incentive problems. America’s forward looking, pro-innovation, pro-science culture meant that in the past we were more likely to protect the future.

We could solve many more of our problem if both sides stowed some of their cultural agendas to focus on areas of agreement. I think, for example, that we could solve the climate change problem with a combination of a revenue neutral carbon tax and American ingenuity. Nuclear, geo-thermal, hydrogen–these aren’t just clean fuels they are better fuels! Unfortunately, instead of focusing on innovation we get a lot of nonsense about paper straws and low-flow showers. I hate paper straws and low-flow showers! There is a wing of the environmental movement that wants to punish consumerism, individualism, and America more than they want to solve environmental problems so they see an innovation agenda as a kind of cheating. Retribution is the goal of their practice.

In contrast, what I want is for all of us to use more water, more energy and yes more plastic straws and also have a better environment. That’s the American way.

Subscribe to Faster, Please! for more.

Learn Public Choice!

The Public Choice Outreach Conference is a compact lecture series designed as a “crash course” in Public Choice for students planning careers in academia, journalism, law, or public policy. The Outreach Conference will be online Monday July 25 to Saturday July 30, noon to 1:15 est daily. Sign up here!

Everyone welcome. Teachers please do let your students know about this opportunity!

Monday, July 25
An Introduction to Public Choice—Alex Tabarrok
Tuesday, July 26
Arrow’s Theorem and All That—Alex Tabarrok
Wednesday, July 27
Public Choice and Development Economics—Shruti Rajagopalan
Thursday, July 28
Public Choice and The Military Industrial Complex—Abby Hall Blanco
Friday, July 29
Government by Insurance or Who vouches for You?—Robin Hanson
Saturday, July 30
Hayek and Buchanan—Peter Boettke

Sign up here!

Automatic Tax Filing?

Pro-publica regularly reports that H&R Block and Quicken lobby against allowing the IRS to pre-fill tax forms. Sure, of course they do and that’s bad. It doesn’t quite follow, however, that “Filing Taxes Could Be Free and Simple” if only for such lobbying. In fact, Lucas Goodman, Katherine Lim, Bruce Sacerdote & Andrew Whitten estimate that less than half of tax forms could be filled out correctly by the IRS and those are the simpler types where the costs of private tax preparation services are lower:

Each year Americans spend over two billion hours and $30 billion preparing individual tax returns, and these filing costs are regressive. To lower and redistribute the filing burden, some commentators have proposed having the IRS pre-populate tax returns for individuals. We evaluate this hypothetical policy using a large, nationally representative sample of returns filed for the tax year 2019. Our baseline results indicate that between 62 and 73 million returns (41 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return. Accuracy rates decline with income and are higher for taxpayers who have fewer dependents or are unmarried. We also examine 2019 non-filers, finding that pre-populated returns tentatively indicate $9.0 billion in refunds due to 12 million (22 percent) of them.

Jeremy Horpedahl has an excellent post explaining why:

…there is one major thing missing from your income tax withholding estimate: your spouse’s income. You see, the United States is one of the few remaining OECD countries that primarily taxes income based on the family unit (you can use “married filing separately” as a status, but generally there is no benefit and you might lose some deductions). Most countries tax based on your individual income, even if you are married. This is important for two reasons. First, it means there is a “secondary-earner penalty,” where one spouse faces a much higher marginal tax rate (this is different from the “marriage penalty,” but that’s a topic for another day. For purposes of a pre-filled tax return, the second and larger issue is that your employer has no idea how much tax to withhold because it is dependent on how much your spouse makes (and whether you are married).

Moving the US to a system of individual taxation…would simplify the calculation of your taxes.

The other major factor that Jeremy mentions is that the US simply tries to do a lot through the tax code so we have lots of itemized deductions or special tax structures–veterans, widows, widows of veterans–which make it difficult to pre-fill taxes without either simplification or a major overhaul of the administrative data system.

Jeremy also worries that pre-filling will further disconnect the payment of taxes from services rendered thus making costs more opaque. Probably true, although I think that ship has sailed.

What should I ask Leopoldo López?

I will be doing a Conversation with him, do read his whole Wikipedia page but here is part of it:

Leopoldo Eduardo López Mendoza (born 29 April 1971) is a Venezuelan opposition leader. He co-founded the political party Primero Justicia in 2000 with Henrique Capriles and Julio Borges and was elected mayor of the Chacao Municipality of Caracas in the regional elections held in July 2000. He is the National Coordinator of another political party, Voluntad Popular, which he founded in 2009…

In September 2015, he was found guilty of public incitement to violence through supposed subliminal messages, being involved with criminal association, and was sentenced to 13 years and 9 months in prison.

He served seven of those years and now is free and has left Venezuela.  He is also an economist, with a Kennedy School background, and has written a book on energy issues.

So what should I ask him?

The Minimum Wage, Rent Control, and Vacancies or Who Searches?

In an interesting new paper Federal Reserve economists Marianna Kudlyak, Murat Tasci and Didem Tüzemen look at what happens to job vacancy postings when the minimum wage increases.

The vacancy data in our analysis come from the job openings data from the Conference Board as a part of its Help Wanted OnLine (HWOL) data series. HWOL provides monthly data on vacancies at detailed geographical (state, metropolitan statistical area, and county) and occupational (six-digit SOC and eight-digit O*Net) levels starting from May 2005. HWOL covers around 16,000 online job boards.

…Our identification strategy exploits the idea that different occupations can be differently impacted by minimum wage hikes due to differential mass of occupation-specific wage distributions concentrated around the prevailing minimum wage. We formalize this idea by analyzing wage distributions by occupation at the state level using micro data from the Current Population Survey (CPS). We identify occupations with large shares of employed workers at or near the state-level effective minimum wage and we refer to these occupations as “at-risk occupations.” We then estimate vacancy growth in at-risk occupations relative to vacancy growth in other occupations around the time when minimum wage increase takes place in the state, and relative to growth in vacancies in at-risk occupations at the national level.

…We find a statistically significant and economically sizeable negative effect of the minimum wage increase on vacancies. Specifically, a 10 percent increase in the level of the effective minimum wage reduces the stock of vacancies in at-risk occupations by 2.4 percent and reduces the flow of vacancies in at-risk occupations by about 2.2 percent.

…We find that firms cut vacancies up to three quarters in advance of the actual minimum wage increase. This finding is consistent with the firms’ desire to cut employment and vacancies being a forward-looking tool to achieve it. This finding is also consistent with a typical announcement effect of a policy change. Formally testing for the parallel trends assumption in our triple-difference identification, we find that at-risk and not-at-risk occupations do not have statistically significant differences in their vacancy trends prior to the typical announcement period. But the negative effect persists even four quarters after the minimum wage increase. The cumulative negative effect of a 10 percent increase in the minimum wage on total vacancies is as large as 4.5 percent a year later.

…We find that vacancies in occupations that typically employ workers with lower educational attainment (high school or less) are affected more negatively than vacancies in other occupations. The negative effect on vacancy posting is exacerbated in counties with higher poverty rates, which highlights another trade-off that policymakers might want to take into account.

This reminded me of a similar paper on rent controls (ungated) by Are Oust that Tyler and I mention in the forthcoming edition of Modern Principles of Economics.

Are Oust studied rent controls in Oslo, Norway and found that during the rent control era it was common for landlords to require their tenants to be of a certain gender, age, occupation and even religion (which would be illegal in the United States). Landlords would also find ways to charge extra by asking renters for extra services such as baby-sitting, garden work or snow-clearing. When rent control was eliminated, however, the number of apartments increased and landlords no longer advertised these kinds of requirements. Perhaps most telling, in the rent-control era it was common for renters to advertise “Apartment Wanted” but when rent controls were lifted it became much more common for landlords to advertise “Apartments for Rent!”

In other words, in a free market firms search for employees and landlords search for renters but under the minimum wage and rent control, workers must search for jobs and renters must search for apartments to a much greater extent.

What is your most underappreciated paper?

If you are a scholar working primarily in the social sciences and/or humanities with at least 4000 Google Scholar citations, we hereby invite you to identify one or two publications with publication date 2012 or prior, and for which the count is lower than your present h-index, that you consider underappreciated. It is OK that the publication is coauthored.

…We encourage you to remark briefly on why you select the publication, and to provide a link to it. However, your entire contribution, including the referenced item(s) should be no more than 200 words.

That is from Econ Journal Watch, instructions for participating are at the link.

The macroeconomics of a pandemic

Hence, aggregate demand stimulus is one quarter as effective as in a typical recession where all labor markets are slack.

That is from a new Baqaee and Farhi piece in the May AER, AEA gate.  It is a discouraging sign how little talk was heard of this kind of argument until recently.  The piece is titled “Supply and Demand in Disaggregated Keynesian Economies with an Application to the COVID-19 Crisis.”