A Note on the Case-Shiller PDX Numbers

The August Case-Shiller numbers are out and finally the Portland area has some strong growth to report.  August is in the prime home buying season and it is good to finally see some good numbers after trolling for so long on the bottom.  Now we wait to see if this trend can be sustained.

From the O:

Month-over-month growth has slowed, and Case-Shiller may reflect the usual seasonal decline in home prices in coming months. "Fits and starts would fit with the general pattern you might expect," said Josh Lehner, an economist with the Oregon Office of Economic Analysis. "When you're at this low level of growth, you're very susceptible to shocks. If you're at stronger growth levels, you're a little more isolated from these kinds of variations."

Well said.  With this and the rosy prognosis of the Fed, perhaps better days are ahead for our state...

Picture of the Day: Oregon Poised to Return to Strong Growth?

Molly Young at The Oregonian has the story.

Destructive Storms and Economics

A question that gets asked once in a while is how destructive storms affect the economy - could they possibly be a good thing?  After all, there are a lot of businesses that stand to benefit from the related clean-up and reconstruction activities.  The answer is yes and no.  The yes part comes from the same old fiscal stimulus idea - spending money causes it to circulate, multiplier effects, yadda, yadda yadda...

But this is a minor consideration - mostly destructive storms destroy value and this makes us poorer as a society.  Loosing ones house, car, etc. to a storm does not do anything but take away or diminish the value of a valuable and productive asset.  So, sure the money you spend to have the house fixed, for example, might give a little boost to the local economy but it will make you less well off - it is money that, prior to the storm, you didn't have to part with to have your asset be at full value.  

Just a thought I have on the day Sandy makes landfall.  It is also a day in which I awoke to find a big giant tree branch fallen in my driveway.  Nice to provide work to aborists and all that, but the few hundred dollars it will probably cost me is not fun to part with.

Election 2012: Who Will Win?

Do you believe pollsters? Or do you believe economists?

I think the truth is that this election cycle is so different that inference from previous experience is not very reliable.

I figure I'll know when I wake up on November 7.

Stimulus v. Austerity, Redux: US and UK on Divergent Paths

Over at Vox Eu, Alan Taylor and Moritz Schularick compare the performance of the US and the UK in a financial recession. They find the US doing a bit better than what one would predict and the UK doing considerably worse.

The takeaway is, of course, that this is suggestive of fiscal stimulus being a better response than austerity in such times.  But, as with everything, we will never have the counterfactual and so more general conclusions are probably best to avoid.  Still, the bulk of the evidence right now seems to be in Keynes' corner.

A Note on Ballot Measures

In years past I would have been all over the ballot measures, trying to do a relatively sober economic analysis of the pros and cons of such measures.  This year I have not done so and there are a few reasons for this.

One: I think I have covered a lot of the territory before. I have weighed in many times on school funding and have discussed the bond measure on capital construction for PPS. I did a post a few years ago on what the economic literature says about the social cost of gambling when the first Wood Village proposal was put forth. I think the economic evidence in support of inheritance taxes is strong. Finally, I just have no interest into getting into the weeds on the marijuana measure (get it? 'weeds' ... I crack myself up...), but there is some interesting evidence about how marijuana use and adolescent sexual behavior are linked (weakly), how marijuana laws and drunk driving interact (more marijuana, many fewer DUI arrests), decriminalization and high school graduation rates (improve - strangely enough) and the economic impact of decriminalization and taxation (lots of $$).  Have fun.

Two: there are some very tough calls, most notably Measure 85 which would take the corporate kicker and devote it instead to school funding.  I am a huge proponent of school funding and a kicker skeptic so you'd think I'd be all for this.  But I have serious reservations.  I think we need wholesale fiscal reform to provide stability to the state budget and I think we need to incorporate the kickers into a rainy-day fund.  This does not do anything of the sort (I wish it put funds into a dedicated rainy-day schools fund that stipulated the terms of its use).  And, in fact, may not help schools at all as the state government can (and most likely will) just shift other general funds away from schools in response.  But I don't think the kicker matters much to businesses anyway - they can count on them and therefore don't plan for them.  So the only question to me is: will the passage of this measure make it more or less likely that a more wholesale reform will take place?  Not sure, but there is a reasonable argument that through the passage of this measure the government will hear that Oregonians think schools are important and are willing to trade off the kicker for more school support.  But it could also bury the idea of reform by giving a false sense that we have already made a big step in that direction.  I just don't know.

Three: I am busy, busy, busy and have already wasted too much time on the blog today!

So good luck in making your own choices, I hope some of this helps, but whatever you decide to do, please vote!

Picture of the Day: Who are the 47%?

From a provocative post at the CBPP.  Debate away.  I'll just throw in here (as is mentioned at the bottom of the post) that the EITC is responsible for a bunch on low-wage earners not paying income taxes - the EITC is the centerpiece of the "workfare" movement that rewards those that take low-income jobs rather than staying on the dole.

College is Still One of the Best Investments You'll Ever Make

A fantastic article from the Hamilton Project via Brookings that makes very clear that the investment you make in your own human capital through a college education is about as good as they get. [HT: Greg Mankiw]

While rising student debt and payments to colleges are a cause for concern, we have found that college is still one of the best investments an individual can make. Ensuring that all students have access to this investment requires both a commitment to making it financially feasible at all income levels and a productive K-12 system that prepares students for the next level of education.

If you had any doubt here are two graphs that should convince you:

Note that this not only says that benefits far outweigh costs, but that this difference is not shrinking durning the recession and in the long-term is growing despite the increasing cost of college.  As far as a long term investment an overage 16% lifetime return is pretty darn good:

Having said all of this, there is one big caveat: you don't just pay your tuition, receive your degree and get a better income - college is hard work.  What you are buying is the OPPORTUNITY to substantially increase your human capital.  It is still up to you to maximize the return on this investment through very hard work while in college.  I see so many students sleep-walking through college and I always think about what a shame they are not maximizing their investment (read: potential).

So, while these are average returns, individual returns will vary and are probably very highly correlated with the amount of effort expended in college.

Most Important Picture of the Day Ever!

From The Economist.  Pierce Brosnan the most deadly, but Daniel Craig the most bedrunken.  Sadly Craig has less time for the ladies - but maybe Skyfall will correct this.  Dalton, who we must all agree was the worst of them all, shows the magnitude of his impotence.  Interestingly, Connery, whom I associate with the era of hard drinks and cocktails was practically a teetotaler.  I refuse to slag off Roger Moore whom I grew up with as Bond, even though many would.

Okay, extra credit: put these in chronological order and correlate them with some economic stat and call it the bond index.  Trust me, it will be pure gold.  I am too busy lazy to do it.

Some Interesting Economics Reads

Reinhardt and Rogoff argue that this US recovery is very typical, not exceptional, for recovery from financial crises. Above graphic from The Big Picture blog.

I have been conspicuously silent on the economics Nobel this year for the simple reason that I am only vaguely familiar with their work.  But here is an interesting entry, a paper on how to make the NFL draft more efficient.  I should state that this is NOT a new idea, I went to grad school with a friend who, prior to his Cornell PhD studies, worked for NERA and at that time pitched to the NFL a better draft solution which entailed monetizing it and running it as an auction.  They didn't bite.

Does income inequality impede economic growth?  The evidence is mounting.

The economics of stolen bicycles.  And the economic solution?

Reagan budget director David Stockman on why Romney's claims of job creation are false.

Profile of Romney's "go to economist," Glenn Hubbard.

And here is a watch, not a read.  From The Wall Street Journal, Nobel award winning economist Michael Spence on why he thinks Obama's economic plan is better than Romney's:

Oregon September Unemployment 8.7%

Oregon's unemployment rate fell slightly, from 8.9% to 8.7% but, as I have been saying all along, this is not the number that matters as it represents the supply and demand equilibrium.  What matters are jobs and in September the state shed a whopping 7,900 of them on a seasonally adjusted basis.  This bucks the national numbers which saw strong job growth so perhaps we will see a significant future revision.  Either way, it is further evidence of a recovery that is like an engine with a bad carburetor - it goes but in a sputtering and halting way. 

Convention Centers: A Cautionary Tale of Supply and Demand

Via Jack Bog I found this very interesting article about the glut of new convention space and the lack of any new demand for said space.  Yes there was a crash of attendance with the housing bust but in general since 2000 there has not been much new demand.

The question for convention center hotel advocates is, I suppose, does Portland have a comparative advantage in the convention business?  What makes planners confident that conventions will come and fill up those hotel beds?

The School Bond

I was quite bemused by an op-ed in today's Oregonian against the school bond measure.  It is both typical and confused:

When the Big One hits Portland Public Schools, it won't be an earthquake. It will be the realization that a half-billion dollar school bond can't buy a good education in Portland Public Schools.

Why?

Because money can't buy parental involvement -- one of the most important influences on every child's education.

That half-billion dollar bond will not be used to hire more and better teachers.

Nor will it add more classroom days. In 2012-13, Portland school students have almost 170 days. The national norm is 180 days.

And the bond will not lengthen the school day.

Instead, school bond supporters have seized on seismic safety. This is an emotional ploy, just as they have resorted to the kind of empty proclamations -- "a great city deserves great schools" -- that is associated with advertising, not education.

Typical in that the authors talk about instructional issues as missing from the bond.  Yes, the bond does not address the day-to-day operations of the schools and yes class size, contact hours and rewarding and promoting effective teachers is important and not part of the bond.

Confused in that these are all recurring budgetary items that are quite distinct than the one time expenditure the bond is proposing.  This bond is not about fixing the recurring budgetary woes of PPS but about addressing infrastructure.  Mashing the two together is misguided and misleading.  And then trowing in parental involvement, which has nothing to do about either, as the lead?  Bizarre.

And to belittle seismic safety as an emotional ploy is alarming and offensive.  If you know anything about PPS buildings and are not absolutely terrified of an earthquake then you are not paying close enough attention.

Here is a typically confused line:

What will the students gain? Upgraded middle-school science labs, some roofs, and disability access, which we thoroughly support. But a half-billion dollars, spent on buildings, cannot be spent on operating costs. The operating levy passed last year will not be enough to save teacher positions next year nor the next three years after.

Ummm...first of how about gaining buildings that will not collapse upon them and crush them to death in the inevitable earthquake.  Second, once again, the levy is not about operating costs - that is a recurring budgetary item that is mainly handled at the state level, this is about infrastructure.

The authors go on to state that PPS did not learn enough from last year's no vote.  I think they did.  My biggest concern last year was the lack of attention to seismic safety which I thought should be the number one priority.  I know, as do the authors of the op-ed that fancy facilities matter little in student achievement, but this has nothing to do with seismic safety. The bond is not about 'fancifying' facilities, but making sure they are minimally structurally sound.

Yes, they should have made a better proposal last year and I am frankly glad it failed, because we finally have a bond measure that addresses the elephant in the room: the threat of a big earthquake and the devastation it will reap on PPS schools.

[Full disclosure: I have two kids who attend a PPS school in one of the most seismically vulnerable buildings.  But I believe that in ten years, when they are out of PPS, I will still feel the same way about the vulnerability of our kids to the big earthquake and support expenditures to rectify the situation.]

US October Jobs Report

Yes the headlines will all be about how there was a significant drop in the unemployment rate from 8.1% to 7.8%.  I say significant because psychologically a drop from the 8 range to the 7 range has a big impact, but otherwise it is still pretty modest 0.3% drop (and psychology matters a lot, mind).  What we should be focusing on, as I have said all along, is the jobs numbers and even at 114,000 this is a very anemic number - barely eclipsing the growth of the labor force.  A robust recovery would look like 250,000 to 300,000 jobs.

Still, I suppose it gives Obama the headline number he is looking for going into the election, though arguably Romney has the stronger talking point about job growth.

In better news, revisions the jobs numbers for July (revised upward by 40,000 to 181,000) and for August (by 46,000 to 142,000) suggest a lot stronger job growth over the summer than we thought. Not 'robust' by any stretch of the imagination, but very solid numbers suggesting a growing economy.  This gives Obama a pretty strong talking point himself and a pretty solid platform to suggest the economy is on the right track if not yet up to speed.

Both arguments are valid in my view: yes we are on the right track and recovering, but we are also recovering very slowly.  I'll show my cards (well not really, I have mentioned this many times here) and say I am in the camp that thinks a more forceful stimulus response is what we needed (remember my cries for block grants to the states?) and that austerity is exactly the wrong response to this particular crisis.  

But I am getting a bit too far into the political weeds here and simply say that as an economist I am still disappointed in these numbers and won't be happy until we have a string of 200,000-plus job growth months. But we are getting there and I blame Europe mostly for the current headwinds but I am worried about China going forward.

Comparative Advantage, Learning Curves and Streetcars

Faith Cathcart/The Oregonian

The news that the huge delays and problems with the locally built streetcars will cost Tri-Met a bunch of extra money to pay for oversight of the engineering work by United Streetcar brings me back to a post I wrote a while ago.  What I said then, and bears repeating now, is that by insisting on building our own streetcar we are ignoring comparative advantage and that could cost us.

Previously Portland bought streetcars built in the Czech Republic by Inekon Trams.  The Czech Republic has both more expertise in streetcar manufacturing and lower labor costs. Thus, there is good reason to suspect that they have a comparative advantage in streetcar manufacturing relative to the US.  Economic theory is clear that both the Czech Republic and the US are made better off by concentrating on manufacturing what we do best and buying the stuff that we don't from the other country.

The objection is that by buying local ones we are helping the local economy, putting local people to work, etc. And in this one specific case this is true.  But overall we are not doing ourselves any favors.  We are essentially wasting money buy buying a more expensive and potentially less reliable product.  That is money that could have been invested rather than wasted which would be a net gain to the economy.  We may have put a specific few lucky iron workers to work but the rest of the economy suffers.  [As a quick example think of the unemployed bus drivers who can't get work because Tri-Met has to cut back on busses thanks, in part, to the extra cost of the local streetcars]

I am pretty confident this is true at the moment and for the short term, but does it mean we made a mistake?  Not necessarily.  Once we look at a dynamic model it may turn out that investing in local streetcars was a good idea.  How? Well consider the idea of the learning curve.  Currently United Streetcar of Oregon is suffering from a decided lack of experience in building streetcars, but they are learning and eventually they could become a low cost provider.  Here is the basic model in a single graph from Krugman's International Economics text:

Suppose Inekon's cost curve is the upper one labeled L and United Streetcar is the one below labeled L*.  Currently, because they have been doing for a while and know a lot about building streetcars, they are at Q* and there unit cost is C1.  United Streetcar is just beginning and so their cost is C0, which is higher than C1.  Over time, however, they will learn, their costs will come down and they may actually be able to better Inekon in terms of cost. So by supporting a fledgling local industry now, you may create a competitive and viable industry later.  

But, and there is always a but, is there any reason to suspect the cost curve of United Streetcar to be below that of Inekon?  I suspect not from labor costs alone.  But there is also a similar model whose graph looks almost identical except instead of a learning curve it describes economies of scale.  

If you change the horizontal axis to total current output instead of cumulative output you get a story of economies of scale.  In fact with economies of scale, United Streetcar's cost curve can be the upper one and Inekon's the lower one, but if United Streetcar can grow to a sufficient size while Inekon stays relatively small, United Streetcar can gain the cost advantage purely through scale effects.    My doubt about this story is that it is hard to imagine the streetcar market growing to one where there is sufficient output to justify mechanization of a lot of manufacturing processes that is the source of a lot of economy of scale effects. 

I also doubt it because other communities are getting in on the act.  Seattle announced last year that their streetcar would also be manufactured locally - though you'll notice that it is in partnership with Inekon and the streetcars will be assembled locally but most of it will be manufactured in the Czech Republic.  Anyway the point is if all US cities doing streetcars start manufacturing locally, than there will be no great scale effects coming to United Streetcar.

So consider this a cautionary tale: what seems great for the local economy could just be doing it harm.

Tax Refugees Redux

An interesting Op-Ed in The Oregonian today that echoes the post I read yesterday decrying The Oregonian's use of the bogus boogeyman of the tax refugee. Today, Jon Roark, who has done real empirical work in the area (as opposed to drawing ridiculous conclusions from one statistic) refutes the idea of the tax refugee entirely:

The evidence shows Measure 84 won't affect whether people come and go from Oregon. If you still believe taxes matter more than anything else when choosing a place to call home, it may just be because you already live near your family without any snow. After all, if taxes were the dominant force, everyone would live in New Hampshire, where there are neither income nor sales taxes. Then again, it is cold there.

So let's put to rest this idea of the tax refugee and talk about the tax system and potential reform substantively.  And Oregonian editorial board, please contribute positively to this debate and don't help drag it into the muck where it will inevitably get stuck.

On Tax Refugees and the Oregonian

One of the most familiar boogymen of anti-tax activists is the tax refugee.  All of those rich people who are flooding out of Oregon to escape our taxes. Unfortunately for them the evidence is not on their side.    Yet, despite this the scare tactic never seems to go away.  And so it was with considerable dismay that I see that The Oregonian editorial board has decided to use the scare tactic and cite a totally meaningless statistic to back it up.

This is exceptionally poor. It is intellectually dishonest or lazy or both and does not befit a board that wishes to be taken seriously.

Don't get me wrong, I am perfectly happy to engage in a discussion about the appropriate way to deal with capital gains in the tax code and the disincentive of the high rate of taxation relative to the benefits the revenues provide.  And I am even willing to identify it as one thing that a comprehensive reform should potentially address.  But let's not get silly about it.

Here is the big table and the related passage from the editorial:

The rates imposed by individual states matter because people may move freely, and taxpayers can time their capital gains. Don't want to pay the tax? Don't sell your asset until you've established residency in a more hospitable state -- like Washington, which, like eight other states, does not tax capital gains.

Numbers provided by the Oregon Department of Revenue illustrate the phenomenon (please see graphic). In tax year 2007, for example, 297 Oregonians with capital gains income moved to Clark County, Wash. Their average capital gain that year was $166,455, or four and a half times the size of the average capital gain reported by the roughly 264,000 capital gains payers who remained in Oregon. And the year before packing up for tax-friendly Washington, the tax emigrants reported, on average, $32,468 in capital gains.

First, the only statistic that makes any sense to use here is the net movement of people with capital gains income (not to mention knowing the real reason these folks moved rather than inferring it is all about capital gains taxes).  Second, what evidence is there that this is hurting Oregon business? If I know a promising start up in Portland, the fact that I live in Vancouver will prevent me from investing?  This seems patently absurd.  Third, once again remember that this capital gains is taxed when the asset is cashed out and is turned into income - to be, presumably, spent.  Living in Washington is expensive in terms of consumption taxes and when that capital gains income is spent it is taxed in Vancouver at a rate of 8.4%.

What bothers me most is that anyone who is serious about making tax reform a reality should know better than to resort to bogus and inflammatory rhetoric - we get too much of that from politicians as it is.  I expect the O to be a place of sober thought and judgement - to rise above the rhetoric.

So by all means let's talk about tax reform in Oregon, but let's do it honestly and without all of the scare tactics that will derail the very process we hope to achieve.