How much did interest rates matter for the housing boom?
Both theory and data suggest that lower real rates cannot account for more than one-fifth of the boom in house prices.
That's from Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko; here is more. Here is some of the theory:
If people expect to move in the future, low interest rates today will not lead them to bid up prices so much now because they realise they might have to sell later at a lower price when rates are higher. The option to prepay also weakens the link between current interest rates and house prices for the same reason. Rates also should have little or no impact on prices in elastically supplied markets as shown in Glaeser et al. (2008).
Finally, if people are credit-constrained, lower rates today need not lead to higher prices. After all, if the marginal buyer cannot take advantage of those lower rates, they should not affect the buyer’s valuation of a home. Taken together, we show that these factors can reduce the predicted impact of interest rates on home prices by about two-thirds, bringing it down to 6 or 8 from previous conclusions of around 20.
Venezuelan markets in everything
A Venezuelan politician is offering breast implants as a prize in a raffle to raise funds for his parliamentary election campaign.
"Some people raffle TVs and we decided to offer this. It's an interesting prize and there's a lot of interest," Gustavo Rojas, an opposition candidate for a National Assembly position, told Reuters while campaigning in Caracas.
Here is his defense of the policy:
"The raffle is a financing mechanism, nothing else. It's the doctor who will do the operation, not me," he said.
The link to the story is here and for the pointer I thank MikeRosenwald and also Daniel Lippman.
Assorted links
What I’ve been reading
1. The Private Lives of Trees, by Alejandro Zambra. He has snuck up on us and suddenly he is one of Latin America's best writers. As an extra bonus, you can read this in a single sitting, and still wish to read it again.
2. Burmese Lessons: A True Love Story, by Karen Connelly. Insights into dissidents, why Burmese intellectuals love books so much, and the author's sex life. She doesn't wish to call the country Myanmar. I liked it, although it would be easy to mock in a hostile review.
3. Book of Days, personal essays, by Emily Fox Gordon. She is a self-described "faculty wife" (I know her husband, the philosopher George Sher, a bit) and she has been seeing therapists most of her adult life. This is a more multi-faceted book than it may sound, and it is good for thinking through what a workable marriage actually consists of.
4. The Death of French Culture, by Donald Morrison and Antonie Compagnon. Maybe there is nothing new here, but it is useful to have a statement of French culture-bashing in one coherent place. Antonie responds, by confessing a sense of desperation.
5. Understanding The Book of Mormon: A Reader's Guide, by Grant Hardy. I only skimmed/browsed this book, but I learned a great deal from even that limited treatment. It's a serious, substantive treatment, historical and literary rather than religious. For instance, I had never even known before who "Mormon" was. This book is getting very good reviews and deservedly so.
Is being interesting more important than being happy?
Vimspot asks:
2 things I'd love you to elaborate on (though perhaps you left them as cliff hangers for a reason):
1. You once said being interesting and responsible are more important values than happiness. Could you elaborate on why you think that? http://www.marginalrevolution.com/marginalrevolution/2009/12/gretchen-rubins-the-happiness-project.html
It's more interesting if you get only one of the two queries, even if it makes you less happy.
There's also the value of being interested.
"Happiness" to me sounds boring, as if the person has a limited imagination when it comes to wants and an inability to be frustrated by the difficulty of creating new peak experiences.
"Responsible" is the right thing to do and it usually carries with it some sense of fulfillment.
"Interesting" helps other people expand the horizon of their wants, since you show them some new goodies on the table.
Viewed as a signaling problem, "happiness" fails when it comes to credibly demonstrating the possession of some extreme quality or another. The busier people are, and the higher wages are, the more important it should be to signal extreme qualities to command the attention of interesting others.
What does the word "important" mean anyway? It presupposes the value judgment in question.
Penelope Trunk has interesting posts on this topic:
People with interesting lives do not get offended that they cannot be happy. Happy people are offended that they cannot have interesting lives.
A simple parable of price stickiness and international externalities
Olivier Blanchard and Nobuhiro Kiyotaki published a famous "Keynesian" paper in 1987 and it remains a well-cited piece in macroeconomics. One central result is that prices and wages can get stuck too high, above market-clearing. Market participants who produce more and lower prices and wages confer a strong large and positive externality on other individuals (or regions) in the market. Of course in the absence of such adjustments, activist monetary policy is recommended, but the point about externalities remains.
Yet often, today, we are told that the individuals (or regions) which produce (i.e., export) more are imposing negative externalities on other individuals or regions.
Of course the Blanchard and Kiyotaki model had its limitations. It did not, for instance, incorporate open economy considerations. It could be that the star producers impose an unfavorably high exchange rate on the broader region and hurt the ability of the broader region to export to the larger world economy.
When the open economy considerations are relatively strong, that coincides with…the conditions under which a coordinated fiscal policy will prove counterproductive, for reasons shown by the Mundell-Fleming model. In other words, if you think the strong Eurozone countries are hurting the Eurozone weakies, you also should be skeptical about coordinated European fiscal policy. This paper surveys some key issues.
In many open economy versions of the B-K model, or variants, looser monetary policy simply exports the problems of the region to other parts of the world. So why advocate such policies, especially if you are an outsider? Maybe the EU determines its own economic destiny (fine by me) but then we're back to German production and prosperity helping Spain rather than hurting it, for the reasons given by B-K.
In this well-regarded model, the international spillover effects from the monetary expansion can be either positive or negative. But it takes work to get those effects into the positive category.
Here is a survey of some literature which extends the sticky price model to open economy and policy coordination settings.
It is commonly suggested that German exports damage (or help) Spain without considering the broader implications of that proposition.
Overall, the results may depend on whether wage rigidity is real or nominal in each currency, the degree of capital mobility, the currency of invoicing in which sticky prices are set, and how much market participants look forward and consider stocks in addition to flows. This paper surveys some issues. There are many permutations, to the point where they are perhaps no longer very useful.
I wish to emphasize the broader point that not all combinations of views here are mutually consistent.
Sentences to ponder
Despite all the alarmist rhetoric, the bond vigilantes have been perfectly happy with the JGB market, presumably because Japan offered something much rarer than mere fiscal rectitude, namely deflation.
Here is more.
Assorted links
1. In defense of reading James Joyce.
2. Luxury retailing booms while discount houses suffer.
4. The early history of publishing.
5. Small town pros (very interesting, and it's about sports).
Why isn’t this on Robin Hanson’s blog?
Older people like reading negative news stories about their younger counterparts because it boosts their own self-esteem, according to a new study.
Or on Bryan Caplan's blog, for that matter? Here is more and I thank Daniel Lippmann for the pointer. The underlying data, by the way, are taken from Germany.
Will the Chilean miners still be paid their wages?
The union is making its demands right now (Sp.) and the final outcome is not clear. The union is demanding that the government accept responsibility for paying the miners, as apparently they no longer consider the company a reliable creditor. They then want the government to try to recover the funds from the company. So far the government is strongly resisting this suggestion. Another account of the dispute is here.
Update: So far it seems that corporate payment of wages will continue through August but after that is uncertain.
Markets in everything
Music lovers can now be immortalised when they die by having their ashes baked into vinyl records to leave behind for loved ones.
A UK company called And Vinyly is offering people the chance to press their ashes in a vinyl recording of their own voice, their favourite tunes or their last will and testament. Minimalist audiophiles might want to go for the simple option of having no tunes or voiceover, and simply pressing the ashes into the vinyl to result in pops and crackles.
The full link is here and I thank VaughanBell and also Allison Kasic for the pointer. Occasionally I've wondered whether my funeral ought not to consist of playing a recording of Brahms's Ein Deutsches Requiem (loudly) and then asking everyone to leave. This innovation puts a new slant on that idea.
Lomborg vs. Lomborg
The world's most high-profile climate change sceptic is to declare that global warming is "undoubtedly one of the chief concerns facing the world today" and "a challenge humanity must confront", in an apparent U-turn that will give a huge boost to the embattled environmental lobby.
…But in a new book to be published next month, Lomborg will call for tens of billions of dollars a year to be invested in tackling climate change. "Investing $100bn annually would mean that we could essentially resolve the climate change problem by the end of this century," the book concludes.
…In an interview with the Guardian, he said he would finance this investment through a tax on carbon emissions that would also raise $50bn to mitigate the effects of climate change, for example by building better sea defences, and $100bn for global healthcare.
The full story is here.
Barro v. Barro
Robert Barro today in the WSJ, The Folly of Subsidizing Unemployment, estimates that UI extensions have increased the unemployment rate by 2.7 percentage points.
To get a rough quantitative estimate of the implications for the
unemployment rate, suppose that the expansion of unemployment-insurance
coverage to 99 weeks had not occurred and–I assume–the share of
long-term unemployment had equaled the peak value of 24.5% observed in
July 1983. Then, if the number of unemployed 26 weeks or less in June
2010 had still equaled the observed value of 7.9 million, the total
number of unemployed would have been 10.4 million rather than 14.6
million. If the labor force still equaled the observed value (153.7
million), the unemployment rate would have been 6.8% rather than 9.5%.
It's not clear to me why we should assume that the share of long-term unemployment in this recession should equal that in 1983.
Barro also argues:
We have shifted toward a welfare program that resembles those in many Western European countries.
In contrast Josh Barro, son of Robert, in How much do UI Extensions Matter for Unemployment, concluded that 0.4% was probably on the high side:
…Two Fed studies suggest that [extensions of UI] may have contributed 0.4 to 1.7 percentage points to current unemployment. But a closer look at this research makes me skeptical that the effects have been so large.
…The incentive effects of UI extension must also be weighed against
the stimulative effects of paying UI benefits. For some reason it’s
become almost taboo to note this on the Right, but UI recipients tend
to be highly inclined to spend funds they receive immediately, meaning
that more UI payments are likely to increase aggregate demand. UI
extension also helps to avoid events like foreclosure, eviction and
bankruptcy, which in addition to being personal disasters are also
destructive of economic value.As a result, I am inclined to favor further extension of UI
benefits while the job market remains so weak. I am not concerned that
this leads us down a slippery slope to permanent, indefinite
unemployment benefits (which historically have been one of the drivers
of high structural employment in continental Europe) as the United
States has gone through many cycles of extending unemployment benefits
in recession and then paring them back when the economy improves, under
both Republican and Democratic leadership.
I call this one on both counts for Josh.
Assorted links
1. The maturity structure of publicy-held debt (scary, like a teaser-rate mortgage).
2. How big a stimulus did we need?
3. Waltz with Bashir and now Lebanon are two of my favorite movies over the last five years.
4. Garett Jones on Twitter: "Cities are popular. Cities are population sinks. Thus cities are able to circumvent ev psych urges. How?"
Sentences to ponder
Campaigns are built to fool us into thinking that we're voting for individuals. We learn about the candidate's family, her job, her background — even her dog. But we're primarily voting for parties. The parties have just learned we're more likely to vote for them if they disguise themselves as individuals. And American politics would work better if we understood that.
That's from Ezra Klein.