The Price of Love

I have often remarked that, if I could do it all over again, I should have been an economics major. I was the curve-setter in my micro-econ class and ended up with over 100% for the semester. And my interest in the topic has continued far beyond my college years. In fact, I may be one of the few living Americans (human beings??) who has watched an entire session of (former CBO Director) Douglas Holtz-Eakin's testimony to a session of Congress live on C-SPAN.

Talk about your riveting drama. I mean who could take their eyes off this guy when he's discussing the deadweight cost of proposed tax legislation? (Notice the gritty stubble mildly evoking the Don Johnson-Miami Vice look, but sans the pastel-hued linen sportcoat to maintain an aura of gravitas.)


(Douglas Holtz-Eakin)

In any case, had I followed this potential lifepath, not only might I have had the chance to hang out with Doug (or Holtzie-E as he's known on "the street"), but it is possible that I could have more efficiently won the affections of my lovely wife through the use of love ballads such as the one noted below.

I mean, what woman could withhold her heart when courted with the likes of this:

"Girl Your Marginal Benefits" (listen here)

Now girl being with you has always been so tough
With each passing minute your marginal cost goes up
But my love is inelastic and it all belongs to you
I'm the only love producer and my good is for you to consume

Cause girl your marginal benefits far outweigh your marginal costs
Without our equilibrium baby well you know I'd be lost
Trapped inside this market I need you to buy my love
Girl without your complementing goods well I'm just not enough

Now you say that I'm producing below my ATC
But I'm optimizing quantity baby, why can't you see?
We could share this surplus each and every day
If you would just buy my love I'd make my fixed costs go away

Baby I want to keep you for the long run (Oh yeah)
I think our supply and demand will become one

Cause girl your marginal benefits far outweigh your marginal costs
Without our equilibrium baby well you know I'd be lost
Long run equilibrium is no place for me
I need the profits of our love to grow exponentially

Courtesy of Greg Mankiw.

They don't call it the dismal science for nothing

Robert Shiller, Yale economist, who predicted the housing bubble attempts to look into his crystal ball in this interview with analyst Henry Blodget.

Shiller: It's the biggest [housing bubble] in world history. We are entering a new era.

[snip]

Blodget: Just to clarify that, because I think that's probably shocking to a lot of people, you're saying that we're [only] halfway back down to effectively fair level.

Here's Shiller's quantitative analysis of long-term housing values (inflation-adjusted) from which he bases the above estimate.




What many people don't often realize is that housing per se isn't actually historically a great investment in terms of value appreciation. People tend to underestimate the cost of the home improvements that they make along the way and of course inflation boosts the nominal perceived value upon resale.

But, home ownership mostly creates a backdoor savings plan via the payments made on the mortgage principle, and thus has served as an important vehicle for middle class wealth accumulation as a side effect of the slow increase in equity over time. That was, of course, when people were actively looking forward to paying off their mortgages (i.e. neighbors used to hold "mortgage burning parties" once they had paid in full) instead of pulling out the increased paper equity value via home equity loans and lines of credit.

Now, obviously, housing is a highly locale-specific product. So, even if Shiller is correct in aggregate, there will be some areas that are not as bad, but that also means there will be others that will be even worse.

Via Bloomberg:

It has taken Susan Erb just three years to see the value of her Merced, California, home plunge by more than half to $350,000. Next month, her mortgage payment jumps 20 percent to $3,321 and she knows she can’t afford it. Her bank won’t rework the loan unless she stops paying altogether.

[snip]

Merced, the epicenter of the U.S. foreclosure crisis, demonstrates the steep challenges President Barack Obama will face in trying to stem defaults. One in 59 housing units in the Merced metropolitan area received a foreclosure filing in January, the highest rate in the U.S., according to RealtyTrac Inc., an Irvine, California-based seller of default data. For- sale signs are everywhere and a building boom fueled by subprime mortgages has been brought to a standstill. Just 16 construction permits were issued last year. In 2005, there were 1,427.

“We’re ground zero,” said Merced Mayor Ellie Wooten, 75. The city, population 81,000, had an unemployment rate of 15.5 percent in December, “and it’s going to get worse,” she said.

One of the key metrics that is always useful to look at is rent comparison. At a basic microeconomic level the "value" of the house has to be correlated to the monetary stream of payments that someone is willing to pay to live in it (or similar accomodations). So, if house rents in the area are far below the average mortgage payments, there is an economic incentive to rent rather than buy. And, this economic reality will continue to place downward pressure on prices until they come into balance.

Rents (and therefore housing prices) get bid up either when a) the area population increases or b) the average wealth of the citizens increase, since both place upward pressure on prices.

By contrast, in a separate article I have read that there are welfare recipients living in some of the above-noted Merced McMansions because the rental market there has fallen so fast with so much foreclosed housing on the market. And, anybody that owns a home there, even if they weren't personally irresponsible, is going to get hurt badly by all this.

Hey brother, can you spare a balance transfer?

Megan McArdle on how the financial crisis is changing the state-of-play in the credit card industry:

It used to be that credit-card companies lured customers with cash rewards. Now American Express Co. is paying to get rid of them. The card issuer is offering selected customers a $300 AmEx prepaid gift card if they pay off their balances and close their accounts.

The unusual move underscores how quickly conditions have deteriorated in the credit-card market. The current economic morass was provoked by spiking mortgage defaults. But as the economic crisis widens and unemployment climbs, there is growing concern that credit-card defaults will soar into the stratosphere as well.

"This is a huge paradigm shift," says Curtis Arnold, founder of CardRatings.com, a credit-card review Web site. He says he expects other large companies to follow suit with offers to entice consumers to pay off their balances, as card issuers cope with increasing defaults.

[snip]

I'm hearing a lot of discussion among friends and on finance shows about a new dilemma cash-strapped consumers are facing: pay down credit card debt, or save cash? The answer used to be a slam dunk: with interest rates at 20%, you pay off the cards, and run them up again if you hit some desperate emergency.

But with credit lines being slashed, that's no longer a safe bet; you could pay off your cards, get laid off, and find yourself with no safety net. Then again, if you don't pay off the cards, you're more likely to get your credit line cut.

No one I've talked to has a clear answer other than: cut your spending to the bone and put half what you save thereby into a bank account, the other half into paying down your cards. Which is why all the restaurants in DC seem unusually spacious these days--when I walk by them. Even with no crushing credit card debt, we, too, are eating at home.

The volume of credit card offers filling my mail box has declined markedly and we have been having similar family budget conversations in my home, which is to say that we have never really known any severe financial adversity in our lives in large part due to the easy availability of cheap credit. When Alice & I were both in school, we could simply charge things we needed but didn't have the money to pay for right then. Further, we could get much of it at 0% interest through utilizing revolving balance transfer offers, so there wasn't even a financial penalty for making such a choice.

Thus, we have no charming stories, like my own parents, of eating popcorn for an entire week while awaiting your first paycheck from a new job. However, I'm pretty sure that kind of experience only tends to be considered *charming* when viewed through the long lens of past memory. At the time, I doubt charming was the first word that came to mind.

Can we get Pat Sajak as Commerce Secretary?

Megan McArdle has some new ideas to deal with the banking crisis:

For the next round, I'm proposing a new instrument to be known as the "Squibble", which will have an unknown and unknowable face value based on a secret random numbers table, a payout schedule to be determined by spinning a big wheel installed in the company's headquarter lobby for that purpose, and a structure to be arbitrated under the financial laws of a country picked at random every quarter.

This will prevent anyone from definitely stating that the banks are undercapitalized. It will also provide financial journalists with some much-needed entertainment.

The pre-historic GingerMan emerges

One of the blogs I read regularly is Rod Dreher's Crunchy Con. As an Orthodox Christian and social conservative, Dreher & I have little in common philosophically, but this is why I find it interesting to read him. I get some insight into a mind that works very differently from my own.

Shortly before I started this blog, I posted a reader comment to Dreher's blog. It was the first comment I had ever made there, or on any blog anywhere. But, a short time later, the GingerMan was born.

Thus, my blog comment on Dreher's site stands as a kind of proto-GingerMan climbing out of the primordial ooze of my thoughts and onto the dry land of the blogosphere, but still struggling to stand upright on its own (though I am not sure that Dreher would appreciate my choice of a Darwinian analogy here).

Here was Dreher's post in the midst of the initial unveiling of the credit crisis on Nov 20, 2008:

The WSJ's Daniel Henninger sees the economic crisis as fundamentally a crisis of faith and morals. [em: mine]

Excerpt:

What really went missing through the subprime mortgage years were the three Rs: responsibility, restraint and remorse. They are the ballast that stabilizes two better-known Rs from the world of free markets: risk and reward.

Responsibility and restraint are moral sentiments. Remorse is a product of conscience. None of these grow on trees. Each must be learned, taught, passed down. And so we come back to the disappearance of "Merry Christmas."

It has been my view that the steady secularizing and insistent effort at dereligioning America has been dangerous. That danger flashed red in the fall into subprime personal behavior by borrowers and bankers, who after all are just people. Northerners and atheists who vilify Southern evangelicals are throwing out nurturers of useful virtue with the bathwater of obnoxious political opinions. [em: mine]

The point for a healthy society of commerce and politics is not that religion saves, but that it keeps most of the players inside the chalk lines. We are erasing the chalk lines.

Feel free: Banish Merry Christmas. Get ready for Mad Max.

Well, everybody said "Merry Christmas" back in 1929, and still. But I see his point.

Now, those who read Dreher regularly will readily see the appeal of this article to Rod's sensibilities. It refracts the economic crisis through a lens of moral degeneracy and reframes the narrative as one of retributive cosmic justice for our straying from the moral path we had formerly embraced. All that's missing is a few thunderbolts from the sky to bar-b-que Bernie Madoff in his shoes before he is imprisoned for massive financial fraud.

This struck me as utter bunk. And, it got my blood up. So, I posted the following comment (in part) as a reply:

This is just pathetic.

Let me tell you a fairy tale about the great Pastoral Fantasy of American past. Back then, people were nothing but wonderful, neighborly yeoman farmers. We were all Christian and lived by a strict moral code and an ethic of honor. Owing to this fact, there was no greed. It was just hand-shake agreements and square-dealing all-around. Then the Sixties came and the Garden of Eden was overrun with hippies and gays.

Ever hear of the Dutch Tulip mania of the 1600's?

[snip]

The reason the Greatest Generation may have been more “restrained” in their risk-taking appetite is not due to their superior sense of morality but because they had come through the searing experience of the Great Depression itself.

While you wave at this point in your comment at the bottom of the post, Rod, you are also way too quick to lay the blame for any societal ill at the feet of individual personal morality and lack of religious adherence. Otherwise, you wouldn't have posted this horses*** in the first place.

In a weird way, when I read such obvious self-congratulatory moralizing, I feel that I am more in touch with our collective "fallen nature" than conservatives such as Dreher. I don't think human nature has changed much over time, and the ethical failures of our current age (to the extent that this particular crisis itself even has a principally ethical root, which I dispute) are the same as they ever were. Whereas, Dreher and others long for some mythical Eden-like past where, owing to stricter religious observance across society, we escaped our capacity to sin and lived in a Latin Mass-centered moral paradise.

I don't believe such an ethical nirvana has ever existed (that's in Heaven, remember?). The critical moral issues that religions speak to were all present in the past and remain so today, irrespective of differences in formal modes of religious observance.

In short, being religious on the surface of one's life does not ensure an ethical core. You would think this would be a lesson someone such as Dreher would have internalized better than most. But, maybe it is one lesson that is only learned slowly and painfully.

As Dreher recently admitted:

Most Catholics, though, and most people in general, have a very difficult time seeing that their own side is capable of doing terrible things. Before the scandal, I was what you might call a political Catholic. Yes, I knew that all have sinned and come short of the glory of God, but in truth I believed that the real problem in the Church was the liberals. And I could give you a lengthy catalog of the bad they had done to and in the Church. Though I'm not a Catholic anymore, I don't think I was wrong about those things.

What I was wrong about, though, and very, very wrong indeed, was assuming that "our side" was therefore blameless. I really did think ideologically. Once, when I lived in Washington, someone brought up then-Bishop Charles Grahmann of Dallas for some reason. "Is he orthodox?" I asked. Yes, came the answer. And that settled it for me: Grahmann was one of the good guys. No more questions needed to be asked.

In fact, as I would find out once I got here, Grahmann was one of the bad guys in the Church. His public orthodoxy, while commendable, told us very little about the way he governed the Catholic Church in Dallas -- which, as it turned out, was terrible.

As I was beginning to report on the Catholic sex abuse scandal, I was warned by a reputable and deeply knowledgeable Catholic priest, a man who has been made to suffer for his orthodoxy, that I better not assume that just because a priest or layman claims to be orthodox, that they're trustworthy. Many villains hide beneath the cloak of orthodox Catholic piety, he told me. It's a feint they use to throw people off their scent. Trust me, he said, I've seen this a lot.

[snip]

What I found in actual experience is a mixed bag. I found liberal Catholic laymen and priests with whom I agree about little theologically, who were absolutely heroic in the scandal. I found conservatives with whom I agreed about most everything who were cowardly. What I found mostly, though, was that a man's true character could not be reliably discerned from his theological orientation. It was so much easier to be able to separate the sheep and the goats by ideology. But it's not real, and to give into that temptation is to set oneself up for humiliation, or worse, the perpetuation of evil. [em: mine]

[snip]

It's a temptation every one of us faces -- and if you don't think you face it, you are setting yourself up for a fall. I'm not saying there is no such thing as good and evil, right and wrong, or that all sides are always equally culpable in wrongdoing. What I'm saying is what Aleksandr Solzhenitsyn said: the line between good and evil runs right through the human heart. As soon as we forget that, we're in trouble.

"As soon as we forget that, we're in trouble." Now that's a place where Rod & I can agree in full voice.

The Bum Rush

Courtesy of the Freakonomics blog, comes this revelation by Edward Conlon whose memoir Blue Blood recounts his experience as a Harvard-educated writer who joins the NYPD.

Conlon has been getting information from a homeless heroin addict named Charlie, regularly paying Charlie small sums of his own money in exchange for tips.

Charlie has a homeless friend named Tommy. One day on the street, Conlon runs into Tommy, who tells him a location where crack sales occur.

Conlon writes:

I handed Tommy some money, he held up his hands and said, “C’mon, Eddie, you don’t have to, it’s okay.” I said, “It’s all right, you guys work, you take risks for us, you should get paid.” He took the money, but he shook his head.

“Don’t take this the wrong way, but I feel a little funny, since you guys pay out of your own pockets. Do you know how much we make out here, panhandling, during rush hour?’

“No, how much?”

“About a dollar a minute.”

“Oh.”

I didn’t take my money back, but I saw his point. Charlie and Tommy made more money than us. I should have realized that earlier, as the math was not complicated — we took home less than a hundred dollars a day, while their habits were at least that.

I tried not to dwell on the fact that, economically, a New York City police officer was a notch down from a bum.

It is amazing when you think about it. Our society is so damn rich that even the bums are living large.

Dude, Where's My Bailout?

There seems to be somewhat of a desire to look at the auto bailout as a tool to give the government leverage to force the Big 3 to to "finally do the right thing" with respect to hybrid cars or green technology more broadly. Now, we've got them where we want them!

But, these are private companies, not sub-divisions of the Department of Energy. So, if the legislature wants to see more hybrid car development, the quickest way to foster this outcome would be to dispense with the jaw-boning of the company executives and pass a hefty gas tax.

For example (Cost per Gallon)
$7.13 - Amsterdam
$2.61 - America

This is why cars are so much smaller and fuel-efficient in Europe, because they tax the hell out of gasoline. So, I'll be looking forward to all those "Vote $7 Gas Now!!" bumper stickers in the fall of 2010 campaign.

In the meantime, back on planet Earth, there are very legitimate concerns with having government dictating the behavior of the Big3 in a fine-grained manner, as Yglesias rightly notes:

A lot of this talk has an air of socialistic hubris about it. If this line of thinking were correct and the primary impediment to the production of technological miracles was a lack of government leverage, then state-owned enterprises would have been a smashing success.

In reality, outside of a relatively narrow range of utility-type activities, they’ve been flops. If the negative externalities associated with carbon emissions were correctly priced, I’m quite sure that would lead people in various places to develop lower emissions cars. But is just sort of pointing at GM’s engineers and telling them “make low-emissions cars!” really going to lead to the intended result?

[snip]

Let me further add that the risk here, as I see it, isn’t that we’re going to waste too much money on a Detroit bailout. Rather, the risk is that we’re going to slide into a situation where big swathes of the economy are dominated by zombie firms. If firms with unviable business models are prevented from failing, then other more successful firms can’t arise or expand to fill the niche and the whole sector goes dysfunctional employing tons of labor and resources but not creating real value.

And then you have other sectors that are being productive but that are burdened with taxes that are being used to prop up sectors that aren’t creating value. Then, even if we manage to halt the slide into recession we’ll have created a situation in which it’s difficult to return again to growth.

But, from everything I read, it thankfully doesn't appear that this is what will be happening.

The firms are going to be "rescued" in the near-term, mainly because there is no way in the current credit environment that they could possibly secure additional financing if they went into Chapter 11 re-organization. Thus, they would proceed into full-blown liquidation and in the current economic environment that would be a "catastrophic" outcome, according to Moody's economist, Mark Zandi, in his testimony to Congress. In short, he basically said that the current solution is undesirable, but the alternative is even worse.

On a related note, after 8 years of listening to George Bush sound like a man who is still waiting for his anesthesia to wear off, it is almost disorienting to hear a Republican politician sound as competent and well-informed as Bob Corker does in his direct and insightful questioning of the auto execs before his Senate committee.

NOTE: the audio and video tracks are out of sync, but Corker's performance is genuinely impressive and surprising short on grandstanding.

Mathematical Musings on Unemployment Figures

I really hate crap like this typical article from MSNBC:

Skittish employers slashed 533,000 jobs in November, the most in 34 years, catapulting the unemployment rate to 6.7 percent, dramatic proof the country is careening deeper into recession.

Look, if you are going to make broad comparisons across such a wide range of time (2008 back to 1974), then you need to make some nominal effort to create an apples-to-apples scenario.

Total US workforce (approx.)
2008 - 136,167,000
1974 - 77,657,000

Now, it is clear that a decline of 533,000 jobs is a far greater impact when the workforce is almost half what is is today. So, what exactly is the point of the comparison to 34 years ago? Does it say anything meaningful?

To me, it is a mathematical version of Orwell's Politics and the English Language (unemployment today is double-plus bad). Lazy usage of math impedes clear thinking in the same manner as lazy use of language.

Video: Princeton economists discuss crisis on Wall Street

From UChannel.

Princeton economists review recent events on Wall Street and assess the implications for the economy and public policy.

Panelists:
Hyun Shin, Professor of Economics;
Markus Brunnermeier, Professor of Economics;
Harrison Hong, Professor in Finance;
Paul Krugman, professor of economics and international affairs;
Alan Blinder, Professor of Economics and Public Affairs

Video: MIT Panel discusses financial crisis

Recorded on Oct 9, 2008..

A panel of five MIT faculty experts in economics and business analyzed the ongoing financial crisis in the U.S. and world markets.

The panelists focused on different aspects of the history, the present unfolding, and the likely future of the financial mess, and emphasized that the situation is far more complex -- and the long-term outcome more uncertain -- than is typically portrayed.

Panelists:
Ricardo Caballero, Professor of Economics and International Finance;
William Wheaton, professor of economics and urban studies;
Andrew Lo, Professor of Finance MIT Sloan School of Management;
Bengt Holmstrom, Professor of Economics;
James Poterba, the Mitsui Professor of Economics.