Thursday, March 20, 2008

Economist's Notebook: Cost Disease and the Decline of Burglaries

NPR recently did a story on the decline in Burglaries in the United States. They interviewed a reformed burglar who said that people don't keep cash around anymore and that the increase in alarms means it is a bigger hassle, but the thing that stuck out to me was the statement that you can't sell stuff for anything anymore. It used to be that you could steal some electronics and make some quick cash, but when a new DVD player can be had at Wal-Mart for $50, how much would a stolen one fetch on the street? Close to zero.

When I was the victim of a burglary at my old apartment at NW 23rd and Glisan in Portland (this was long ago when the area was hip and cool, way before the gentrification that exists now), the thief took the only things of any value in my apartment: my VCR and my SLR camera. These would be absolutely worthless now and the whole endeavor would be pointless.

Over at Marginal Revolution, Tyler Cowan notes that economics actually predicts this phenomenon - through an idea known as Baumol's cost disease (and once again MR steals my ideas, and yet somehow before I write about them - I have to keep the tinfoil on my head!). The basic idea of cost disease it that there are some things that we naturally don't see much productivity gains through time (Baumol's example was a symphony orchestra) while in many other areas (consumer electronics for example) we do. This helps explain why the cost of tuition at a university keeps rising faster than inflation - I am not that much more productive than a professor 100 years ago when it comes to the hard work of teaching and learning (though as a researcher I am, but tuition is reflective of the teaching part and my research is an externality). What is becoming relatively more valuable through time, therefore, are services, like teaching college students economics, but these cannot be captured by a burglar very easily.

So cheap overseas labor is apparently putting burglars out of work as well. What is a poor meth-head to do? Apparently more and more identity theft.


Jeff said...

Interesting theory by Baumol -- it certainly makes sense.

However, there remain expensive things in many homes not affected by low wages in China -- gold & diamond jewelry, guns, silverware, etc.

Or maybe there really are fewer things of value. One reason: People nowadays are spending all their hard-earned money on mortgages and other basics. The cost of living is too high (read: overpriced houses) to buy the frivolous stuff.

Or maybe there's less valuable stuff in homes because of changing consumer preferences. If someone has $1500 to spend, would they rather buy jewelry (that's rarely worn) or use it towards vacation? Probably the latter, and that's something that can't be stolen once the money is spent. So burglary doesn't pay.

Fred Thompson said...

Great blog!

Gold, guns, and drugs probably have kept their relative value in recent years and, as Jeff notes. remain targets for burglars, although I think most people keep their gold and valuable jewelry (if they have any), maybe even their silver, safely locked up in a bank-deposit box. But Patrick's point would still hold: there are a lot fewer things worth stealing, because things in general are really cheap, relative to services. like burglary. Hence, less burglary.

Interesting question: what's happened to auto theft? Autos have gone up in quality enough to offset a lot of the decline in the general price of things. Has the fall in auto theft lagged the fall in burglary?

Jeff also mentioned mortgages. I have been thinking about mortgages a lot lately. In states like Oregon, with homestead laws, which effectively limit a homeowner's financial obligations in the case of default to the home's value, not the mortgage's, refinancing to the maximum is an effective way to lock in value. Mortgaging one's home creates a synthetic put on the asset. In which case, the owner keeps the house if it goes up in value and walks away if it drops. Logically, of course, the smart investor would put the proceeds
from the refinanced mortgage in a nice safe investment portfolio, rather than spending
the money. I encouraged my mom to create just such an asymmetric hedge on her home last spring (I also told her to stop paying property tax, since the lien under Oregon Senior Property-Tax-Relief Law, would go to her home not her other assets, and she didn't have enough taxable income to benefit from the property tax shield). She didn't take my advice (on mortgaging her home or on paying taxes, obviously they were mutually exclusive recommendations), but, then, neither did I. But how many Oregonians did? If the answer is a lot, property values wouldn't have to drop very much for us to see a lot of defaults.

One of the points that a lot of folks overlook is that mortgaged homes are highly leveraged investments, i.e., risky. High risk investments tend to earn high returns. The effect of homestead laws, which limit a home owner's financial obligations, is to shift much of the risk to the lender.

Jeff said...

I assume that when you say refinancing to the maximum you mean doing a HELOC, right? I used to get many HELOC offers in the mail, but in the past few months I don't recall getting anything.

I think HELOC is going to be increasingly rare in this new financial environment -- it's getting harder to appraise a home because sales have slowed considerably -- even here in Oregon. Interest rates may be favorable, but banks are also starting to get very nervous about lending out money, especially for HELOC. But the point about homesteading laws is very interesting -- certainly makes a HELOC more appealing.

Fred Thompson said...

Jeff, You hedge only if you are risk averse (most of us are), ideally when everyone else is saying buy, buy. It's a bit late now. So how many folks locked in their gain when they had the chance? And, if things continue to go south, how many will just walk away, some with their cash?

Jeff Alworth said...

So poor burglars are victims of Baumol: it gets harder and harder to find anything of value, yet they can move through windows no more quickly.

But perhaps they'll get lucky and happen upon a goldbug.