Category: Economics

Glaeser, Gyourko, and Saks cite regulatory obstacles as a primary reason why housing prices have risen so much since the 1970s.  I am not convinced that this explains the possibly bubble-like run-up of the last few years, but here is the paper.  Here are Glaeser’s other writings on the topic.  Thanks to an anonymous reader for the tip.

Housing can be lived in, most buyers have only one home, transaction costs are relatively high, and rarely are homes sold and resold in a matter of days.  All those features militate against a housing bubble.  Yet it is scary to see how high prices have risen in the Washington D.C. area.  Prices in my overall region are up 73 percent in the last four years, can houses be worth so much more?  Plus rent-buy ratios have reached apparently unsustainble levels, inconsistent with traditional assumptions about discount rates.

Let’s say you think there is no bubble, what are your options?

1. It has quickly become much better to live in good areas.  I can go to Wegman’s now.  Prices reflect this fact.

2. Traffic is getting much worse, and very rapidly.  People are paying more to be close to the action.  The price movement is lasting, though it does not reflect a true increase in real value, all things considered.

3. When you are trying to decide how much a house in worth, you also care how much other people think the house is worth.  Yet the entire slope of the demand curve is hard to observe.  The real estate market goes through a groping process.  Only as prices and quantities move does everyone realize what the market demand curve looks like.  Suddenly, over the last four years, many people have realized that many other people are willing to pay lots for a quality home.  Price has moved upward rapidly accordingly, but this need not be a bubble.

4. The higher housing price indices are a trick.  In reality some homes are worth a lot more and others are worth a lot less.  But prices move quickly in the upwards direction; in the downwards direction, housing quantity first adjusts and stays slow for a long time.  That is, if you can’t sell your family hearth in Kansas for a decent price, you simply wait for now.  So overall indices appear high but much of this move is a sectoral shift within the housing market from low quality to high.

I put the least stock in #1 and the most stock in #3 and then #4. 

I am not yet convinced there is a housing bubble.  But since I bought close to the peak — had to buy close to the peak — perhaps I am deluding myself.

Addendum: Here is my earlier post on the topic.  Here is Alex.  Here is Brad DeLong.  Here is some Austrian economics.

Matt Yglesias asks.  Brad DeLong answers:

Well, there are three hypotheses:

1. Improvements in firms’ ability to squash unions, and thus shift wage bargains toward employers (the Wal-Mart hypothesis).
2. A slack labor market–much more labor-market slack than the level of the unemployment rate would lead one to expect–in which firms find it easy to hire workers and workers find it hazardous to ask for higher wages.
3. Changes in the international economy that boost the wages of the skilled and educated (whose products can be sold abroad for more) and put downward presure on the wages of the less-skilled and less-educated (who now face much stronger competition from abroad).

I’ll add a fourth:

4. Information technology has become a substitute for many low-wage workers, including those who shuffled papers or performed rote calculations.  Note that the gains from the new technologies are often reaped by equity holders.  Read more here.

Quite separately, on the consumer side, the Internet has resulted in significant welfare benefits, most of which are not reflected in measured real wages.  Admittedly the distribution of these gains is skewed away from the poor.  Many years ago Alex and I wrote a paper called "Who Benefits from Progress?"  In the early years of progress, most of the benefits are reaped by the relatively wealthy.  It is only over time that new innovations become used by, or affordable to, poorer segments of society.

…some economists are sanguine about the country’s ability to support
the elderly and at the same time provide for the young. Gary Burtless,
a senior fellow at the Brookings Institution, noted that the decline in
fertility rates since the 1960’s means that the burden of caring for
the young has decreased dramatically – freeing resources to channel to
the old.

The overall burden on the employed will grow, but not
to unprecedented levels. The ratio of people of working age to those
either under 20 or over 65 will decrease to 1.2 in 2050 from about 1.5
today. But this is still an easier load than in 1965, when the country
was awash with children, and the ratio of the working-age population to
each dependent was only 1.1.

True, the young are cheaper to
maintain than the old. In 1990, economists at Harvard and M.I.T.,
including David M. Cutler and Lawrence H. Summers of Harvard, estimated
that people over 64 consume 76 percent more than children.

Still,
Mr. Burtless estimated that in 2050 a worker will have to sacrifice
49.6 percent of his or her wages – through taxes or other means – to
maintain society’s dependents. That is nearly 6 percentage points more
than in 2000, but it is merely 0.8 percentage points more than 1965.
And the percentage could well be smaller if people work later in life
to pay for more of their keep.

The notion of incredible
competition between what the public spends on the aged and what it
spends on the young is driven by fear, Mr. Burtless said. "But so far
the fears have not been grounded," he said. "In fact, we seem to be
able to do both kinds of things. Increase spending on aged and protect
spending on the young."

This is the most hopeful notion I have heard in some time.  Here is the story.  Here is the home page of Gary Burtless.

Let us not forget about the utility dimension in addition to the fiscal.  Is it more fun to care for the very young or the very old?  The evidence is not so clear cut.  Many people do not enjoy their children as much as they claim; read more here.

The United Arab Emirates says it will use robots as jockeys for camel races from next season.

The move comes after widespread international criticism of the use of young children to ride camels during the long and often hazardous races.

Aid workers say there are up to 40,000 child jockeys working across the Gulf. Many are said to be have been kidnapped and trafficked from South Asia.

The issue of child camel jockeys has been an embarrassing one for the Emirates, says the BBC’s Gulf correspondent Julia Wheeler.

Read more here, and thanks to Dylan Alexander for the pointer.

Addendum: Geekpress offers a photo.  And here is yet another photo, with an excellent quotation, courtesy of a new and excellent blog on the Arab Emirates.

Brad DeLong criticizes Henry Hazlitt’s Economics in One Lesson.  First, "because at least half its pages hint that the works of John Maynard
Keynes are an abomination without ever grappling with the Keynesian
argument."

Hazlitt did not say much about Keynes in his famous introduction to economics but he certainly grappled with the Keynesian argument in his lesser-known
The Failure of the ‘New Economics’: An Analysis of the Keynesian Fallacies.

Second, DeLong quotes Hazlitt:

There are men regarded today as brilliant economists, who deprecate
saving and recommend squandering on a national scale as the way of
economic salvation; and when anyone points to what the consequences of
these policies will be in the long run, they reply flippantly, as might
the prodigal son of a warning father: "In the long run we are all
dead." And such shallow wisecracks pass as devastating epigrams and the
ripest wisdom.

According to Brad this quote is "dishonest" and a "misrepresentation," but Keynes did deprecate saving and recommend squandering.  Famously:

To dig holes in the ground,” paid for out of savings, will increase,
not only employment, but the real national dividend of useful goods and
services. (General Theory, Ch. 16).

Brad seems to think that Hazlitt quoted Keynes out of context because "What Keynes actually wrote in his Tract on Monetary Reform" was:

Now ‘in the long run’ this [way of summarizing the
quantity theory of money] is probably true…. But this long run is a
misleading guide to current affairs. In the long run we are all dead.
Economists set themselves too easy, too useless a task if in
tempestuous seasons they can only tell us that when the storm is long
past the ocean is flat again.

But the misreading is Brad’s not Hazlitt’s.  Keynes is criticizing classical economics for focusing on the long run and this certainly includes the classical focus on savings as a key to economic growth.  Hazlitt, as Brad notes, is restating classical economics so when Hazlitt points out the long-run problems with using spending to increase short-run aggregate demand, Keynes does, in effect, reply "We are all dead in the long run."

For some, it seems, one lesson is not enough. 🙂

Mark Steckbeck (his blog is very good) writes:

Barry Schwartz believes that Americans suffer from too many choices. (PDF file) The result is that we become overwhelmed with too many choices, become depressed, and consequently lead less fulfilling.

I’m certain that Schwartz did not mean that there are too many ideas from which to choose to believe in, but why not? It’s overwhelming listening to political ads during campaigns or editorials and stories on major topics in newspapers. As Ronald Coase said, the reasons for regulating markets for goods is no different than the reasons for regulating markets for ideas, execpt that there’s probably more reason to regulate the latter.

I wonder which ideas Schwartz recommends we eliminate from the set from which we choose.

Cataracts cloud her eyes and arthritis stiffens her spine, but Maria Luisa Torres, 70, still walks the streets of the Merced selling her body, as do many elderly women in the downtown heighborhood…Among the thousands of prostitutes in North America’s largest city are hundreds of women in their sixties, seventies and eighties who continue to sell themselves to earn cash to buy food or medicine…

Some of the prostitutes are eighty-five years old.

Men know she is not young, but she chooses to think that "an antique can be more valuable than something new," she explained.  She strolled through Jardin Loreto, a nearby park, saying to passing men: "Amor, vamos?" or "My love, shall we go?"  After agreeing on a price — often $5 or less — she leads her customer to one of the many run-down hotel rooms nearby.  She has been doing this for decades, since she left the coconut fields in Western Mexico.  At first she had higher hopes and opened a little sandwich kiosk.  But "not even a fly would stop" at her stand, and she turned to the only sure money she could find.

Here is the full story.

One of my Ph.d. students asked me that question.  Similarly, you might wonder whether Hayek adds to the Arrow-Hahn-Debreu equilibrium framework.  Joe Stiglitz insists no; my answer ran as follows:

The invisible hand theorem assumes some (possibly weakened) version of perfect markets.  It suffices for everyone to simply maximize utility or profit, and then all supply and demand curves will cross.  Under spontaneous order, cross-market externalities are more significant.  Markets are imperfect, so people look to institutions — and other markets — to orient their behavior and to predict the unknowable future.  Market choice is a game of interpreting symbols, drawing inferences, and mapping an understanding of context to the appropriate situations.  The resulting order is greater and more complex than the partial equilibrium story we might tell about any single market.

As for Adam Smith, he was closer to Hayek…But the dilemma of the Austrian School is whether it can tell this story without economic analysis collapsing into pure context-dependence.  How much do we really know about how people interpret economic signals?  So far experimental economics — as exemplified by Vernon Smith — has done the most to bridge these gaps.

Another question I heard this week: "Why is it that older people start going deaf, yet still object more to loud music?"  I couldn’t really answer that one either.

A member of the Canadian parliament apparently required that constituents who wanted his help in obtaining visitor visas first post a bond promising that the visitor would return to the home country.   (It’s unclear whether any actual exchanges of money took place or whether this was a publicity stunt designed to promote a bill implementing a more formal procedure.)

The ethics of an MP offering money for services is questionable but the basic idea is sound.  Australia, for example, has had a Security Bond system for nearly five years.  Family who wish to sponsor visitors may be asked to post a bond which is subject to forfeiture if the visitor fails to keep to the terms of the visa.  The bond system is good for the government which has fewer illegal visitors to track down (note that I am not here taking a position on the merits or demerits of immigration) but it’s also good for prospective visitors.

Under the old system if the government thought that a visitor might violate the terms of the visa they didn’t let him in.  Now the family can post a bond and the visitor is allowed entry – moreover, since the money is returned when the visitor leaves, the system has low costs for honest entrants and their families.  Since implementing the system most visitors (68%) are required to post bonds and the entry rate has increased.  A good deal all around.

Brad DeLong notes:

When can deficit spending in a recession help?

1. When it is part of a stable and sustainable structure of economic policy, so that nobody fears that it is the beginning of a process of rampant inflation or expropriation. In that case deficit spending will have no deleterious effects on investment, and to the extent that it gets more money into the hands of those who are temporarily short of cash it will boost demand and employment.
2. When things are already so bad (as in 1933 and 1934) that there is no investment anyway: if business confidence is already at its nadir, deficit spending cannot do any harm by reducing investment, and does good by putting people to work and boosting their incomes and their demand.

I’ll add further conditions, none of them absolute.  First, it should be accompanied by an expansionary yet stabilizing monetary policy (similar to Brad’s first condition).  Second, the money should be well spent, ideally on durable infrastructure.  Third, fiscal policy should be a signal of a government’s competence or seriousness about fighting the recession.  Fourth, I doubt it does much good if the core problem is bankrupt or otherwise malfunctioning financial institutions.

Mostly I am a skeptic about fiscal policy, if only because discretionary fiscal changes tend to be small relative to modern wealthy economies. 

This settlement in western Kenya, where Ms. Odera lives, has become
a giant test tube, and Ms. Okoth’s instruction is one part of that
experiment. Eventually there will be 10 such test villages, scattered
across the world’s poorest continent.

Led by Jeffrey Sachs,
director of the Earth Institute of Columbia University, the project
aims to fight poverty in all its aspects – from health and education to
agriculture and energy in one focused area – to prove that conditions
for millions of people like Ms. Odera and her neighbors can be improved
in just five years.

It is an important and uncertain gambit. If
it fails, initiatives like that pushed recently by Prime Minister Tony
Blair of Britain to greatly increase foreign aid to Africa may seem
foolhardy. If a single village cannot be turned around with focused
attention, how can whole communities and even countries be revitalized?

…The researchers behind the program are keeping track of every penny
they spend, trying to demonstrate that for a modest amount, somewhere
around $110 per person, a village can be tugged out of poverty.

They
have tried to measure exactly how bad Sauri was at the start of the
project last fall. Every home was surveyed to get an accurate portrait
of the population. Blood tests were taken among a smaller group for a
nutritional analysis, because many villagers eat only once a day, and
show it.

Blood will also be tested to determine how widespread
the malaria parasite is, and then again later, to see whether the
mosquito bed nets given to every villager help keep more people,
especially children, alive.

Here is the New York Times story.  Here is my earlier post on Sachs’s plan.  Here is an on-line World Bank discussion about when foreign aid works and doesn’t; they invite MR readers to join in.

The most loyal of MR readers will find this old hat, but the debate at this link, originally done for Reason magazine, provides a good summary of my views. Here is my bottom line:

To the benefit caps that we really agree on, Glassman wants to add government-regulated personal accounts. The economics here are straightforward, once unbundled from benefit caps. Our government would raise taxes (or borrow) to finance further private investment in equity markets. Furthermore those investments are to be regulated by the government. I expect that Reason readers, once they hear the plan described in these terms, will be suspicious.