Category: Economics

Mighty brains of academia and non-profit figure out why Americans are homeless

by philg

There is a new book from some of America’s smartest people. First, the credentials…

GREGG COLBURN is an assistant professor of real estate at the University of Washington’s College of Built Environments. … Gregg holds a PhD and an MSW from the University of Minnesota and an MBA from Northwestern University. … Gregg is also a member of the Bill & Melinda Gates Foundation Family Homelessness Evaluation Committee and co-chair of the University of Washington’s Homelessness Research Initiative.

CLAYTON PAGE ALDERN is a neuroscientist turned journalist and data scientist based in Seattle. … A Rhodes scholar and a Reynolds Journalism Institute fellow, he holds a master’s in neuroscience and a master’s in public policy from the University of Oxford. He is also a research affiliate at the Center for Studies in Demography and Ecology at the University of Washington.

What have these mighty brains learned? From Homelessness is a Housing Problem:

the researchers illustrate how absolute rent levels and rental vacancy rates are associated with regional rates of homelessness.

The higher the rent, the higher the rate of people who can’t afford the rent:

In other words, we aren’t wealthy enough to build and maintain the housing to which we believe ourselves entitled.

Meanwhile, more than 200,000 people come over the southern border every month to claim asylum (US CBP stats) and common decency demands that, regardless of whether any can or do work, all be provided with reasonable quality housing. According to a book that I recently finished, The Swamp, there may be a limit to how many of these newcomers can come to South Florida. From a legal point of view, we can’t keep robbing the federally-protected Everglades of water. Our abuse of the animals who live there has some limits.

From a newspaper that passionately advocates for expanded low-skill immigration… “The Housing Shortage Isn’t Just a Coastal Crisis Anymore” (NYT, July 14):

What once seemed a blue-state coastal problem has increasingly become a national one, with consequences for the quality of life of American families, the health of the national economy and the politics of housing construction.

Freddie Mac has estimated that the nation is short 3.8 million housing units to keep up with household formation.

It is not an expanding population due to immigration that drives up prices in an Econ 101 supply and demand curve intersection, but rather inequality:

Other forces like widening income inequality also worsen housing affordability, said Chris Herbert, managing director of the Harvard Joint Center for Housing Studies. That’s because more higher-income households compete for limited housing (prompting builders to build high-end homes).

Our brightest minds are working on this:

The Biden administration also released a long list of ideas this spring for boosting housing supply.

The word “immigration” does not occur in this article.

Related:

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Dumbest question of the year: why are gasoline prices higher than in 2019?

by philg

Here’s the dumbest question of the year, I think…. if we believe Econ 101, prices are generally determined by supply and demand.

Gasoline prices in 2019 averaged $2.60 (eia.gov). Right now it is about $4.50 per gallon (also eia.gov), though in San Diego last month it was $6.999:

The supply of dinosaur blood doesn’t change all that much from year to year. Demand should actually be lower right now compared to 2022 due to (a) some Americans working from home, cowering in place, etc., and (b) airline staff shortages reducing the number of planes flying. Statista says that worldwide oil demand is slightly lower right now than it was in 2019.

If both supply and demand are roughly the same as in 2019, why is the market-clearing price different?

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Abortionomics: Migrant infants make us richer; native-born infants make us poorer

by philg

We are informed by our leaders and our media that immigrants, including infants, make the U.S. wealthier, no matter how low their skill level and no matter how low their parents’ and grandparents’ skill level (see The Son Also Rises: economics history with everyday applications).

We are now informed that native-born infants make us poorer and, for maximum economic growth, should be eliminated from the U.S. population via abortion care. “Fall of Roe will have immediate economic ramifications, experts say” (Axios):

The U.S. will see devastating economic consequences from the Supreme Court’s decision to overturn Roe v. Wade, experts warned on Friday.

Why it matters: The landmark Turnaway Study found that women who have to carry an unwanted pregnancy were four times as likely to struggle with poverty years later. Raising a child costs over $230,000 on average, according to the Department of Agriculture.

What they’re saying: “This decision will cause immediate economic pain in 26 states where abortion bans are most likely and where people already face lower wages, less worker power, and limited access to health care. The fall of Roe will be an additional economic barricade,” Heidi Shierholz, president of the Economic Policy Institute, said in a statement.

The big picture: In an amicus brief submitted to the Supreme Court last year, 154 economists wrote that there is “a substantial body of well developed and credible research that shows that abortion legalization and access in the United States has had — and continues to have — a significant effect on birth rates as well as broad downstream social and economic effects, including on women’s educational attainment and job opportunities.

Replacement theory has been proven wrong by science. But science also tells us that the only way we can prosper is if we provide abortion care to all pregnant people who are U.S. citizens and import infants and children via migration.

Related:

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Economist answers my question about high interest rates and high deficits

by philg

Two weeks ago: Could our epic deficits drive inflation no matter how high the Fed raises rates?

John H. Cochrane, the superstar economist (and sailplane pilot! How does that work when you’re a professor at University of Chicago and the nearest ridge is 1,000 miles away?), answers the question in the Wall Street Journal… “The Federal Reserve Can’t Cure Inflation by Itself”:

By raising interest rates, the Fed pushes the economy toward recession. It hopes to push just enough to offset the stimulus’s fiscal boost. But monetary brakes and a floored fiscal gas pedal mistreat the economic engine.

The Phillips curve, by which the Fed believes slowing economic activity reduces inflation, is ephemeral. Some recessions and rate hikes even feature higher inflation, especially in countries with fiscal problems.

Higher interest rates will directly make deficits worse by adding to the interest costs on the debt. Reducing inflation was hard enough in 1980, when federal debt was under 25% of gross domestic product. Now it is over 100%. Each percentage point interest rates are higher means $250 billion more in inflation-inducing deficit.

Monetary policy alone can’t cure a sustained inflation. The government will also have to fix the underlying fiscal problem. Short-run deficit reduction, temporary measures or accounting gimmicks won’t work. Neither will a bout of growth-killing high-tax “austerity.” The U.S. has to persuade people that over the long haul of several decades it will return to its tradition of running small primary surpluses that gradually repay debts. That outcome requires economic growth, which raises long-run taxable income. Raising tax rates alone is like climbing a sand dune, as each rise hurts income growth. The U.S. also needs spending reform, especially on entitlements. And it needs to break the cycle that each crisis will be met by a river of printed or borrowed money, bailouts for big financial firms and stimulus checks for voters.

In other words, as long as Congress keeps borrowing and spending, at least according to Professor Cochrane, we can experience inflation even with high interest rates from the wizards behind the curtain at the Fed. Maybe there could be a house price crash due to the high interest rates (how many people can afford a $20,000 per month mortgage on a 4BR?), but that won’t bring down the headline inflation number since house prices were taking out of the government’s official stats. The rent prices that are in the CPI stat shouldn’t come down because mortgage rates are high. In fact, maybe the high mortgage rates will lead to higher rents since renting is an alternative to buying and paying a mortgage.

On the third hand, though our realtor says that the crash hasn’t happened yet here in South Florida, houses are sitting longer on the market. This could be because it is mid-summer and that is the traditional dead season for real estate. Here’s a fairly standard 5BR house on a busy street in Abacoa:

Note the 38 days on the market at the bottom. In January 2022, this place would have sold within two weeks. Zillow estimates the payment for living on this vast 1/4-acre estate and listening to cars zip by all day at $17,576 per month. For that to be one third of a buyer’s income, he/she/ze/they would have to earn $633,000 per year (i.e., be a dermatologist or plastic surgeon).

Related:

  • Cochrane’s calculation of the complete tax rate for a successful Californian (he also has a job next to Stanford): How much is the property tax? In Calfornia, we pay 1% per year. That doesn’t seem bad, except that property values are very high. You can’t get a tear-down in Palo Alto for under $2 million. If you buy a house that costs 5 times your income — say someone earning $200,000 per year buying a $1 million house — then that is equivalent to 5 percentage points additional income tax. On top of 42% federal, 13.2% state, 9% sales, and other taxes, it’s part of my view that we’re past 70% top marginal rate now.
  • “How did Paul Krugman get it so Wrong?” (2009): Most of all, Krugman likes fiscal stimulus. … In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any more effect than spending financed by raising taxes. … If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt. If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up. [Good news for the PPP program is next] If you believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume.
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Could our epic deficits drive inflation no matter how high the Fed raises rates?

by philg

Americans are obsessively following the Federal Reserve’s interest rate adjustments in hopes of figuring out if the future will be inflation, recession, or some combination (stagflation). “Fed likely to boost interest rates by three-quarters of a point this week” (CNBC) is an example.

What if nobody other than the government borrowed money for any reason and, therefore, the Fed’s interest rate became irrelevant to ordinary subjects. Could we still have inflation? Two economists say “yes” in “The Real Cause Of Inflation Is Insane Deficit Spending” (February 2022):

But proponents of MMT do get one thing correct — the Fed can create money to service the debt and avoid a default. But in real terms, meaning adjusting for inflation, this assertion is false. Creating money to service the debt devalues the currency. Investors then receive a lower real return on their holdings of federal debt.

(see also this 1983 paper from the Minneapolis Fed)

In the old days, inflation came down when the Fed raised rates. Therefore, unless our deficits are larger than in the old days, the interest rate hikes should work to tame inflation (maybe by damaging the economy). “U.S. deficit will shrink to $1T this year before soaring, federal forecasters say” (Politico):

While the nation’s shortfall has substantially declined following last year’s $2.8 trillion deficit, the Congressional Budget Office estimates the gap between spending and revenue will grow starting in 2024, reaching more than 6 percent of GDP a decade from now. The U.S. has only run greater deficits than that six times since 1946, CBO noted.

We’re actually in uncharted territory when it comes to deficit spending.

Another reason that inflation came down when the Fed raised rates is that people weren’t able to pay as much for houses, nearly always bought with borrowed money. But the current headline inflation rate has been cooked so that it doesn’t include the actual prices paid for houses or mortgages (those 1980s headlines were too alarming under the old formula!). The inflation rate won’t move until the fictitious “owners’ equivalent rent” changes.

Some prices that are part of the price index will obviously fall if the Fed causes a recession with high interest rates. Used cars, perhaps. But, given the huge deficits indulged in by Congress, will high rates and a recession be enough to push headline inflation down to the 2 percent level that the Fed claims to be targeting? Consider that if there is a recession, the welfare state will automatically kick in to increase spending on housing subsidies, taxpayer-funded health care (more people eligible for Medicaid), SNAP/EBT, Obamaphone, and free home broadband. Congress also likely won’t be able to resist massive new spending initiatives to combat the recession, just as they spent massively to combat the economic impact of the coronapanic shutdowns ordered by government.

Update, June 28: Economist answers my question about high interest rates and high deficits

Related:

  • “President Biden orders 100-percent federal reimbursement for city’s Covid hotels” (January 22, 2021), in which taxpayers in Louisiana and Mississippi were forced to pay for San Francisco’s generosity in providing 2+ years of hotel rooms for the unhoused. If there is a housing “emergency” declared due to an interest rate rise, presumably the same executive order mechanism could be used to increase the federal deficit by spending on hotels.
  • The $12 sandwich here in San Diego is temporarily $14 (up 17%):
  • Below, sign at a South Florida car dealer, June 9, 2022
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Inflation running at 13 percent is characterized as being 8.6 percent

by philg

Inflation is at 8.6 percent: “Consumer prices jumped 8.6 percent in May compared to last year as inflation holds grip on U.S. economy” (NBC).

If we dig into the article a little, however, we find that current inflation, month-to-month, is actually at 13 percent per year (up 1 percent from month to month).

Another example… “U.S. inflation hit a new 40-year high last month of 8.6 percent“ (Politico):

America’s rampant inflation is imposing severe pressures on families, forcing them to pay much more for food, gas and rent.

The costs of gas, food and other necessities jumped in May, raising inflation to a new four-decade high and giving American households no respite from rising costs.

Consumer prices surged 8.6 percent last month from 12 months earlier, faster than April’s year-over-year surge of 8.3 percent, the Labor Department said Friday.

On a month-to-month basis, prices jumped 1 percent from April to May, a steep rise from the 0.3 percent increase from March to April. Much higher gas prices were to blame for most of that increase.

What does Zillow expect for inflation in house prices in our ZIP code (the non-waterfront parts of Jupiter, Florida)? (note that real estate inflation is explicitly excluded from official government CPI) A 14.6 percent boost.

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Supply chain disruptions will end up favoring newcomers in markets

by philg

Our HVAC guy here in South Florida mentioned that he formerly installed Mitsubishi mini-split (“ductless”) air conditioners. Mitsubishi has long been considered the quality leader in this market, which they pioneered in Japan and then in the U.S. Since coronapanic, however, he’s found that most of the Mitsubishi stuff that he used to install went out of stock. “I began putting in GREE, which has a longer warranty and actually seems to have fewer problems and failures.” GREE, a Chinese company founded in 1991 (Wikipedia), isn’t a supplier he would have considered prior to the interruption of his supply from Mitsubishi that was occasioned by the various lockdowns. Now he will default to GREE even when Mitsubishi is available.

I was going to put a UniFi system into our house. This is the brand that I knew and that a friend has had positive experience with. However, everything was out of stock. So I took a reader’s suggestion and purchased TP-Link’s Omada products, which are half the price of UniFi and, more importantly, in stock for 2-day shipping.

Is it fair to say that the “sorry, it’s out of stock” messages from the traditional market leaders are going to turn out to have been the most lasting market disruption of coronapanic?

Related:

  • The pre-coronapanic situation… “Is Lack of Competition Strangling the U.S. Economy?” (Harvard Business Review, 2018): There’s no question that most industries are becoming more concentrated. Big firms account for higher shares of industry revenue and are reaping historically large profits relative to their investment. … incumbent firms in a wide range of industries — airlines, beer, pharmaceuticals, hospitals — are wielding market power in ways that prevent rivals from emerging and thriving. The winners are winning bigger, while the number of new start-ups is falling. With waning competitive pressure, productivity growth slows, wages stagnate, and the gap between winners and losers widens. … Ten years ago, the top four U.S. airlines collected 41% of the industry’s revenue. Today, they collect 65%.
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NYT: the broadest economic recovery entails a falling GDP

by philg

This is one of my favorite New York Times headlines ever: “G.D.P. Report Shows the U.S. Economy Shrank, Masking a Broader Recovery”.

Our technocratically-managed economy is thriving, even if shrinking a bit (the per capita shrinkage would be more dramatic if you consider population growth, just as the headline “GDP growth” figures that we’re accustomed to seeing don’t represent an actual improvement for the average person because there are more people in the US every day). So we shouldn’t lose faith in the central planners.

Speaking of central planners, I visited a friend in D.C. who works as an economist at the Federal Reserve. A few days earlier, she had received the Economist magazine in the mail. The cover story: “The Fed that failed; Why the Federal Reserve has made a historic mistake on inflation”.

One of the things that I like least about the Economist is their faith in technocracy. All of the world’s problems can be solved with enlightened leadership. Here’s how the article begins…

Central banks are supposed to inspire confidence in the economy by keeping inflation low and stable. America’s Federal Reserve has suffered a hair-raising loss of control. In March consumer prices were 8.5% higher than a year earlier, the fastest annual rise since 1981. In Washington inflation-watching is usually the preserve of wonks in shabby offices. Now nearly a fifth of Americans say inflation is the country’s most important problem; President Joe Biden has released oil from strategic reserves to try to curb petrol prices; and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.

It is the Fed, however, that had the tools to stop inflation and failed to use them in time. The result is the worst overheating in a big and rich economy in the 30-year era of inflation-targeting central banks.

(I’m not a subscriber, so I don’t know how it ends. Maybe a reader can enlighten us all!)

Update: After disabling JavaScript for this site in Microsoft Edge, I can see the whole article. Some choice excerpts:

Strip out energy and food and the euro zone’s inflation is 3%—but America’s is 6.5%. Also, America’s labour market, unlike Europe’s, is clearly overheating, with wages growing at an average pace of nearly 6%.

Uncle Sam has been on a unique path because of Mr Biden’s excessive $1.9trn fiscal stimulus, which passed in March 2021. It added extra oomph to an economy that was already recovering fast after multiple rounds of spending, and brought the total pandemic stimulus to 25% of gdp—the highest in the rich world. As the White House hit the accelerator, the Fed should have applied the brakes.

Is it fair to blame the Fed? When the government is spending like an alimony plaintiff, what could the Fed possibly have done to stop inflation?

The good news is that we can continue cheating hard-working foreigners, even as Americans continue to relax at home:

Inflation that is stable and modestly above 2% might be tolerable for the real economy, but there is no guarantee the Fed’s stance today can deliver even that. And breaking promises has consequences. It hurts long-term bondholders, including foreign central banks and governments which own $4trn-worth of Treasury bonds. (A decade of 4% inflation instead of 2% would cut the purchasing power of money repaid at the end of that period by 18%.)

When the Japanese (holders of $1.3 trillion of our debt) come over to redeem the 30-year Treasury Bonds that they purchased in good faith reliance on our integrity, they’ll be able to use that money to buy a one-week visit to Disney World for a family of three?

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Professor Krugman’s Nobel-grade thinking about inflation

by philg

Six months ago, the New York Times’s in-house Nobel-winning economist wrote “Wonking Out: I’m Still on Team Transitory” (9/10/2021):

if we finally get this pandemic under control, the inflation of 2021 will soon fade from memory.

Professor Krugman was correct about Joe Biden getting the pandemic until control. When the Science-rejecting Donald Trump was in the White House 350,000 Americans died with/from COVID-19 in 2020. Due to President Biden’s leadership and the vaccines that He developed, we’re on track to suffer only roughly a third of a million deaths in 2022.

Professor Krugman also seems to have been correct in predicting “the inflation of 2021 will soon fade from memory”, but maybe that is because the inflation of 2022 has been so much more dramatic?

The Nobel laurate is back this week with “How High Inflation Will Come Down”. He starts by doing what my former hedge fund manager friend says nearly all analysts do, i.e., extrapolating from recent events:

Rising prices will get worse before they get better.

Something new for an American journalist or politician… He blames Russia:

Russia’s invasion of Ukraine has caused the prices of oil, wheat and other commodities to soar.

This time it is different:

Forty years ago, as many economists will tell you, inflation was “entrenched” in the economy. That is, businesses, workers and consumers were making decisions based on the belief that high inflation would continue for many years to come.

Things are very different now. Back then almost everyone expected persistent high inflation; now few people do. Bond markets expect inflation eventually to return to prepandemic levels. While consumers expect high inflation over the next year, their longer-term expectations remain “anchored” at fairly moderate levels. Professional forecasters expect inflation to moderate next year.

If the professional forecasters are good at their jobs, why aren’t they absurdly rich via trading on their own previous forecasts and, thus, retired from forecasting?

Nobel-grade thinking… Prices will go down as soon as prices go down:

A lot of recent inflation will subside when oil and food prices stop rising, when the prices of used cars, which rose 41 percent (!) over the past year during the shortage of new cars, come down, and so on. The big surge in rents also appears to be largely behind us, although the slowdown won’t show up in official numbers for a while. So it probably won’t be necessary to put the economy through an ’80s-style wringer to get inflation down.

Professor Krugman agrees with what Chauncey Gardiner pointed out, i.e., that there will be growth in the spring:

The inflation of 2021-22 looks very different, and much easier to solve, from the inflation of 1979-80.

What if it takes a few springs for inflation to subside?

Related:

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Asset price inflation + inflation = demotivation for successful people?

by philg

Although quite a few people of modest means enjoy aviation as a hobby, those of us who fly small aircraft often encounter the financially comfortable ($10-100 million in savings; when a house in Palm Beach costs $210 million, a centimillionaire can’t be considered “rich”). U.S. government coronapanic policies made these folks quite a bit wealthier, sometimes doubling their net worth in nominal dollars. At the same time, what they’re able to charge for working hasn’t changed too much and the Trump tax law changes caused their marginal tax rate to go up (state income tax no longer deductible from federal).

All of these people have enough savings to retire, but many continued to work when a year of hard work could increase their net worth by 5 percent. Quite a few of them have said that they’ve scaled back their efforts ever since asset prices took off. A year of hard work will now bump the net worth by only 2 percent and the typical person I’m writing about is in his 50s or early 60s. He might have only 10 more years of reliably good health. Why spend that final decade of vigor at a desk and starting at a computer if it won’t move the wealth needle significantly? These people already own a house, a vacation house, and a reasonably new fleet of vehicles. They don’t have a landlord demanding a 40 percent rent increase. Why not play tennis, kiteboard, hit the golf course, ski every day, or travel?

Does it matter to an economy when more of the most successful people retire younger? If we assume that their financial success can be attributed to luck, then it might be good. More positions will be open at the top of various enterprises, which will motivate people in their 40s to work harder. If, on the other hand, we assume that hard work, skill, and intelligence were primarily responsible for success, the American workforce is losing a lot of its best people.

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