Now That's a Bridge!

You want to spend on infrastructure? How about this for a new interstate bridge in Portland?

Ponte Estaiada Octávio Frias, São Paulo - Brazil

Another Look at the Case-Shiller Numbers

From the Wall Street Journal's Economics Blog:

Is Deferred Maintenance Spending a Good Idea?

Our Governor has proposed to President-Elect Obama that the federal government give us some dough to spend on deferred maintenance at our state universities.  Is this a good idea?

Well, if it means that outside construction contractors that are otherwise out of work would be employed to do a lot of it then it seems like a pretty good idea to me. Especially because right now with labor and machines being idle, we should be able to do the work at a pretty good price. If it is true that there is no advance planning that needs to be done ad that work could start tomorrow, then again, it seems like a god idea.  If it helps with the education of the state's college students, then its even better (it is not clear to me how much, but if science labs and such are a part of this then I can see some benefit). I am happy to volunteer my office to be the starting place.  

However, if the money is just transfered to universities who will use their already employed staff and divert other monies elsewhere, it is probably a bad idea.  Why, because then the multiplier effect of this spending will be severely muted and universities might benefit but not so much the Oregon economy.

Even better, I would like to see a discussion of the entire range of possible projects - university deferred maintenance, roads and bridges, scholarships, etc. -  the positive impacts of the projects themselves and the expected multiplier effect of the spending.  Let's make sure that if we spend money, we do it wisely.

Housing Market and Credit

The feds are still worried about the housing market (see post below for an idea of why).  So now they have another new plan to get credit going again, especially mortgages. Above is a chart of national average mortgages rates for 30 year fixed conventional mortgages.  This is the one credit market that has done fairly well all things considered (after the Fannie and Freddie bailout - oh, and don't blame Fannie and Freddie for the subprime crisis, the evidence clearly shows it was not they that caused the huge sub-prime glut) 6% historically is a great rate.  But clearly the feds think it needs to be even better to finally put a floor under the free-fall of the housing market.  

The bailout was in the beginning of September and you can see how mortgage rates responded sharply.  Then came Lehman Brothers bankruptcy in mid-september and the credit markets went nuts.  Mortgage markets have struggled since, but have mostly been pretty calm in November.  The bigger problem is that banks are unwilling to loan without a lot of collateral and fantastic credit, so the rate is only part of the story.

Anyway, the point of all this is that the plan today is supposed to try and staunch the bleeding in the housing market as exposed by Case-Shiller.  I wonder if it is a coincidence that they announced this today - the day of the C-S report?

Portland Housing Prices: New Case-Shiller Data

Here are the latest Case-Shiller home price data.  Portland is back to values last seen in February 2006, but is much better off than other cities.  All bets are off for the period ahead. In a normal slowdown I would not be worried, but this is not normal and I am very worried about everything.   

So, to give a little moderating perspective, here is the entire Portland Case-Shiller history:



So, what this shows is what we all know about real estate - it is almost always a good long term investment. We have had a bad year, but one year is but a blip in the grand scheme of things. It also suggests that we might be near the bottom based on long-term trends. But who really knows? Remember, however, that the near complete halt in new construction is providing a very strong supply response which helps prices recover. So though poor housing stars is bad news for jobs and growth, it is good news for the housing market (save for the fact that jobs and growth show up on the demand side as well).

Economist's Notebook: Helicopters

From my office at the Fundação Getulio Vargas in São Paulo, I look out on this view. Fortunately, I have a window that opens.  I am on the 13th floor and so I can hear the faint hum of the horrendous traffic below.  It soft and unintrusive.  What is intrusive is the noise of the multitude of helicopters flying all around (there is one on the top of the apartment building in the picture but a bit too small to see perhaps).  As FGV is right in the central business district, just off the Avenida Paulista, we are in seriously rich businessperson land.  And what do the super-rich do when the traffic in a city becomes too much?  Take to the air, of course!  As I flew into the small airport in the city you could see hundreds of helipads on the apartment buildings.  Its all about the marginal cost, marginal benefit calculation.  The marginal cost of helicopter travel is high and always has been, but the marginal benefit (avoiding hours stuck in traffic) is now very high as well.  So, yes, I can confirm that the legend is true - there are lots of helicopters flying around São Paulo.

Ironically, I was told that one of the most uncorrupt agencies here is not the police, who are corrupt but not too bad (unlike the ones in Rio who are pretty badly corrupt), but the traffic bureau who have a type of traffic cop who can issue tickets, etc. They are everywhere, making sure nothing happens to disrupt traffic.  Traffic is such a politically radioactive topic here, no politician can afford to have a corrupt and inefficient traffic bureau.  Again, its all about the incentives.  And they are efficient: an illegally parked car was causing a bit of a jam yesterday and so I saw the traffic bureau swoop in with a flatbed tow truck and remove it in seconds flat (with alarm screaming) they left a big sign on the curb that said "ILLEGALLY PARKED CAR HAS BEEN REMOVED." No ticket, no warning - boom - car gone.  

Note to self: never rent a car in São Paulo.

Economist's Notebook: From the Southern Hemisphere

Greetings from Sao Paulo. Two interesting snippets from yesterdays O Estado do Sao Paulo (one of the Sao Paulo daily newspapers).

First this for my students of international economics and money and banking:

Luckily for me, the US Dollar has appreciated against the Real considerably - making my stay here much cheaper. Each of my dollars buys more stuff here than it did a few months ago. For example the 50 Reais meal I had yesterday would have cost me $31 at the beginning of September and now costs me about $21. Here is the Dollar-Real exchange rate history for the last three months:



This appreciation of the Dollar is bad for US exporters to Brazil, because now the same goods are more expensive to a Brazilian. It should be good for Brazilian exporters for the opposite reason. But much of Brazil's trade is in primary products (65% of the total value of Brazil's exports according to the article below) and while the Real has been depreciating, the worldwide economic crisis has caused commodities prices to plummet. So Brazil is hurting, here is the banner headline from the Sunday paper:

Crise em países ricos e queda de preços abalam exportação
Valor de matérias-primas, que lideram venda externa, caiu 42% desde julho

By the way, currency depreciations for developing countries are usually bad news if they have dollar denominated debt (which many do), but defending currencies is usually an expensive and risky game.  This, however, is a topic for another time.  

A couple of side notes. I was amused that the newspaper headline called the economic crisis a "crisis in rich countries," this is true, the banking crisis did originate in the US and Western Europe, but, as is noted by this article, the crisis will affect everyone. It is also amusing that they would use the term rich countries as we are so careful to use euphemisms like "developing countries" instead of "poor countries."

Second, as a soccer fan I was very interested to see an article on the latest hot youth bands in Sao Paulo include pictures of two very hip new and hot bands wherein one member of each band was wearing a soccer jersey from the US's Major League Soccer. For those that wonder what non-pecuniary benefits an MLS team might have for Portland, here it is - worldwide exposure. And, by the way, this is why I think MLS is a good long term investment for the Mssrs. Paulson - entering into a global sports marketplace in a way that even the NBA does not have a prayer to match has got to be a good bet.

What's So Bad About Deflation?

Economists are starting to freak out about the possibility of price deflation. The October CPI showed a 1% drop in price level from the previous month. This, in itself, is no big deal and might give consumers a little confidence to spend a bit more, but it can become problematic if it persists and starts seeping into expectations. What we are worried about now is exactly this - expected deflation. But why is this a problem?

When businesses expect prices to be lower in the future, they pull back on investment and output and this leads to lowering employment and (where possible) wages. This will, of course, decrease demand which will put further downward pressure on prices. This becomes a downward spiral and the very scary part is that it is not clear how to make it stop. Generally, to manage inflation the Fed changes its target federal funds rate and if it wants to spark inflation they lower the federal funds rate. But right now the Fed is not really able to do this. Though the target rate is at 1% the demand for treasuries is so high that the effective rate on T-bills is already close to zero. In essence, what the Fed wants is for people to take dollars and use them and is offering a very low price of borrowing, but right now people are so freaked out that they don't want to borrow at any price, in fact they are close to PAYING the US government to keep their dollars safe. Yikes.

There is another aspect of deflation that fuels the spiral: loans (like mortgages) are generally in nominal terms so deflation actually increases the real interest rates on outstanding debt. In other words you give up more consumption of everything else. This leads to lower consumption as well.

So what level of inflation is good? Well, most central bankers like the 1 to 2 percent range.

Economist's Notebook: Risk

Nobel winner Michael Spence gave a talk on the current crisis that inspired this rumination on risk.

Risk in the case of the meltdown of the balance sheets of the world’s most important financial institutions is quite different than the type of risk that financial institutions and insurance agencies were used to dealing with. What characterizes what we might term “normal risk” are three things: it is exogenous, stationary and uncorrelated. What this means is that risk is not affected by the actions of the participants in the market, that the risk is not changing through time and that the risks are not correlated with each other. House insurance is like this. Consider an insurance market for hurricane risk in the Gulf of Mexico. The risk of Hurricanes is not affected my the actions of participants (though the risk of loss is due to moral hazard – those with insurance are less likely to do things to prevent damage when there is severe weather –but this is fairly straightforward to deal with), global warming aside, the risk of a hurricane is fairly stationary meaning it is not changing through time very much, and risks are uncorrelated (a hurricane in Florida does not make a different hurricane in Texas more likely) thus the market works through diversification (no company should concentrate on only one location like, e.g., Homestead Country in south Florida).

The risks involved in securitizing assets and insuring them had none of these aspects. They were endogenous – the behavior of participants in the market significantly altered the risk profile of the assets, from underwriters to credit rating agencies to the institutions themselves. They were non-stationary – the risks were getting worse and worse through time (and quite rapidly). And they were correlated – more risky MBSs made for more risky CDOs and on and on. Thus these institutions were faced with new and non-standard risks that one could argue they were simply not able to deal with. But I think the true answer was that there was such strong short-term pressure to be willfully ignorant that this is what they remained. The profits made on these new securities were so large that to not take part in the market or to pull back at or near the peak would have been very difficult (especially for publicly held companies). This risk was also poorly understood by credit rating agencies and regulators - even when some in the industry raised the alarm, they were largely ignored. Understanding this mew type of risk is key to understanding the way forward.

Even in Brazil: Bad Economist Humor

Befitting the dominant theme of the conference.

Overheard and translated from the spanish - two  Argentinean economists encounter the line for the mens room:

"Oh! It's a traffic jam..."

"Yes, it is a liquidity crisis..."

 

Worlds Old and New

A little travel weary but in Rio (here is a photo from my hotel on Ipanema beach, but of course I got a room through the conference - and conference rooms are always the cheap ones so I get a view in the opposite direction - no matter, Rio is beautiful wherever you look). One thing that strikes me is how easy it is to speak of third world or developing or low-income countries (to follow the lexicon through its progression over the last few decades) as all one group. And there are many similarities: poverty, infant mortality, inequality, low education, etc. But it strikes me at once upon arrival in Brazil how different are the countries of Latin America to those of South Asia where I also have a lot of travel experience, especially in India, and it sheds a little light (as travel always does for me) about my own country.

India's ancient civilization seems to me to be ever-present there, at once a source of strength and a source of inertia.  Old social rigidities like caste and color cast shadow over everything, and while clearly an entrepreneurial spirit has awoken in the sub-continent one wonders just what it would be like without the burdens of history.  Maybe like Brazil.  Brazil strikes me as new-world through and through.  As a west-coaster who shudders at the thought of the east-coast structured society of his Boston Brahmin clan, I am drawn more to Brazil than any other country I have visited.  Free, liberal society has perhaps contributed to the immense inequality, but also perhaps creates an entrepreneurial spirit here that will help drive its economy in the 21st Century.  

I think an analogy can be made of the US and Europe in this regard, but these differences are starting to be eroded by the market-based reforms that have happened in Europe.  Combine that with a higher education system that is quickly catching up to ours and, who knows, maybe European economic growth will hit high gear in the next few decades.

Of course, maybe I am just jet lagged. 

Oregon's $950 Million Hole

While I am off in Brazil, back home the Oregon economy is in free-fall. See what happens when I leave?

Seriously, things were okay as long as there was strong demand for our exports, but when global demand did a 180 I knew we were in for it.  2009 is going to be a year to forget, but we must not mortgage our future again like has been done in the past. Education (as I have been harping on incessantly) is absolutely essential to protect.  Especially, but not only, K-12.  

I hope a federal fiscal stimulus package includes huge transfers for states, because this is where the negative feedback loops are going to occur.  States are hurting so, as they are constrained by budgetary rules to engage in deficit spending, they cut spending and raise taxes causing it all to get much, much worse.

On the Road: Brazil

I am off to Brazil for a conference in Rio where I am presenting some research and from there I am off to do research in Sao Paulo.  I will be in Brazil for most of two weeks (missing my favorite but uniquely American holiday).  Though this is the OREGON Economics Blog, one of the current themes running around my head these days is how much are fortunes are all intertwined, so posting about Brazil, development, etc., I think is fair game.  Besides, it's my blog, I make the rules.  So, I'll report next time from Ipanema beach in Rio.

Ciao! 

Should Detroit Declare Bankruptcy?

I own a GM car.  It is a 21st Century beast however, built in Sweden on a platform that is shared by Chevrolet, Saturn, Opel and others.  It is a good car, I have no complaints, well designed, fairly well built (though a far cry from the quality that Japanese car manufacturer's produce) and wonderfully fuel efficient yet with plenty of zip thanks to a smallish four cylinder engine that is turbocharged.  In short, it should be a pretty darn good car for toady's marketplace.  But sales of my car in the US have been abysmal.  And herein lies the problem with GM in my view.  Too many brands, too many dealers, too many cars - all leading to not enough focus on a core set of cars and research supporting new innovation.  

It is tempting to blame the relics of the strong labor movement for GMs downfall, as I have seen done many times in the last few days in the press, but closer scrutiny reveals that this is more a function of the past labor contracts and not the current labor contracts that are pretty much in-line with those of foreign manufacturers that are doing business in the US (though the effect of these contracts is still lagged). So don't blame labor for this mess.  GM's web site lists 13 brands!?!  Apparently they have over 7000 dealers to Toyotas 1000, this is just too many irons in the fire, no wonder they have not been able to remain dynamic and competitive.

Many observers are saying that Detroit's problems are of its own making and the cure is Chapter 11 bankruptcy.  This would allow them to renegotiate union contracts, get out of pension obligations (at great expense to the US taxpayer presumably), and renegotiate with creditors.   I was of this opinion at first blush.  The problem with this solution is that the traditional device of this type of bankruptcy is the ability (under chapter 11 protection) to secure commercial credit, and this type of credit is not now available - meaning that chapter 11 would quickly turn into chapter 7 and the liquidation would begin.  Perhaps this is all for the best, but in a time when the economy is in a deep, deep nosedive and shedding jobs like crazy the hit that this would deliver may just be a knock-out blow.    I am fairly well persuaded by this line of thought.

But maybe there is a middle way.  Perhaps a government bailout of GM, for example, could be a part of a chapter 11 filing, in the form of a credit guarantee.  Or perhaps some of the provisions of chapter 11 could be imposed on a bailout (insisting on a renegotiation of labor contracts and pensions, for example).  Why must it be a $25 billion hand out or a potentially disastrous chapter 11?  Let's provide them the opportunity to shed dealers, discontinue brands (which is hard with outstanding dealer contracts) and refocus on a core set of products.  

I believe preventing the collapse of Detroit is vital to our efforts to dampen the blow of the economic crisis right now, but lets do it in a way that leaves Detroit dynamic and competitive when it is all over.

Oregon Unemployment 7.3%

The title speaks for itself: Oregon's Economy, like the rest of the nation, is tanking.

The Law of Unintended Consequences

Property tax limitation referenda have been appealing to Oregonians who have passed them in the past.  Most notable of these were Sizemore's Measure 47 and the subsequent Measure 50 which decoupled property taxes with current market values.  Seemed like a great idea at the time, especially when values boomed, but now that values are crashing, it doesn't seem like such a great thing to those in places like Deschutes County which have seen deep declines in the market value of their property.  

What is interesting about this measure is that it is turning out to be a bit of a nice counter-cyclical revenue mechanism in this time of deep downturn.  So though it was never meant to provide such counter-cyclical, pro-revenue protection from a deep recession, it is. 

Which, of course, still doesn't mean it is good policy.  Mechanisms that tie the hands of government reduce government's ability to provide flexible and creative policy solutions during the ups and downs of the economy.  It all suggests that our referendum system needs to be reformed to preserved good governance in Oregon.

Beeronomics: Whither Green Dragon?

There has been a TON of traffic in the beer-o-sphere about the Rogue takeover of The Green Dragon.  Angelo did break the story correctly - kudos Angelo - with some minor arguments in points-of-fact between he and the Rogue folks.  But lament what is to become of the GD if you will, but the economic reality is that the GD is not financially viable as it currently stands.   With the worsening economy, this situation will only get worse.  The Green Dragon, without an outside investor, is going to die.

So an open question: why are we not hailing Rogue as a savior of a beloved pub rather than a destroyer?  Rogue has the resources and brand to turn this into a viable enterprise.  I lament any loss of independent pubs, but we must be honest with ourselves and admit that there are substantial economies when a brewery runs such a place versus an independent businessperson.  The economic realities for pubs right now are not good - and I, for one, have been expecting closures for some time now (and I don't think this will be the last).

Perhaps it is true that many of us feel that Rogue needs to get a little bit better at running its pubs, but as an economist I have to concede that the market has spoken and it loves what Rogue does.   

Rogue is also one of the least corporate of the breweries (you ever notice how much advertising Rogue does relative to the rest? - basically none) and I suspect that the reason they may not have as many independent taps at the GD after the takeover as it does now has more to do with the incredible array of beers they themselves offer than any anti-competitive motive.  

So lament the passing of the independent Green Dragon, but don't turn Rogue into a villain. Rogue is perhaps THE most Oregonian of breweries: willfully independent in spirit and business, unafraid of risk and creative to a fault.  Only a CEO out of his or her mind would approve the number and variety of brews Rogue produces.  I love some of them, detest a few and find others mediocre, but I love the brewery and what it represents.  

Beeronomics: Omens?

Over at the Brewpublic blog comes this shocker: The Green Dragon is going to be taken over by Rogue. Are we seeing the first evidence of the economic downturn hitting the Portland pub scene? Are we seeing the effects of the hops shortage (did the GD ever start brewing its own)? Or are we seeing evidence that the pub scene in Portland is over-saturated? Hmmm...I am not sure if this is an omen of the rough times ahead or just a one-off. Thoughts?

Brewpublic seems to really hate Rogue [update: Angelo of Brewpublic objects to this characterization and I agree, he really hates the idea of loosing the Green Dragon and the potential of its staff loosing their jobs, but hating Rogue is not accurate - my apologies], and while I agree that my experience in their pubs has been one of extraordinarily expensive food and indifferent service, I remain a big fan of the company and (much of) the beer. I don't like this though - I lament any decline in independent tap rooms in Portland. In my neighborhood the Oaks Bottom Public House was bought by the Lompoc folks to the great detriment of the pub. Fortunately there is still the Muddy Rudder. And Portland still has Bailey's Taproom (please serve food!), Henry's, Concordia, Belmont Station and others.

Ah well, at least you don't have to walk far from the Green Dragon to Roots, where they have finished a remodel and now serve lunch! Hey, that reminds me, I'm gettin' a little peckish myself...

Payday Loans in Oregon: An Update

I received an e-mail from a group called the Consumer Credit Research Foundation. This is a non-profit group, funded by payday lenders, that sponsors research on credit markets. They were touting a new study by Jonathan Zinman of Dartmouth College that looks that the effect of the restriction on payday loans in Oregon.

I have posted before with a typical economist's take on the issue: I believe that restricting access to credit (expensive or not) is misguided. If there is a problem with access to credit then do things to enhance access not cut it off. The idea that you are 'helping' people avoid their own bad decisions is government regulation at it worse. What you are really doing, in my view, is punishing the already economically stressed by giving them less flexibility to weather economic turmoil.

So I was really excited that we may have good evidence that these assumptions are correct. Zinman is a young economist with an already stellar research record - he is no hack. Unfortunately Zinman's paper does not provide what I had hoped for. It is not a bad paper, there is no academically dishonest statements, but there are a number of vague and misleading statements that appear to be clearly designed to give the impression to a lay audience that positive evidence is found when it is not.

The study compares pre- and post-restriction surveys in Oregon and Washington of payday loan users. Oregon imposed restrictions while Washington did not. The similarities among the states suggest that these two populations are reasonable for use as treatment and control groups. He finds that payday lending went down significantly in Oregon compared to Washington, which is not a big surprise. Then he finds that former payday loan users shifted:

partially into plausibly inferior substitutes. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

First notice the academic-speak: "plausibly inferior," "evidence suggests," "results suggest." Why does he use these terms? Because none of his statistical tests of these effects turn out to be significant. I am quite ready personally to believe that these suggestive results are actually revealing an underlying fact because I believe theoretically that this is likely the case, but it does nobody any good to read ones prior assumptions into a set of results that are not statistically significant - and not just statistically insignificant but with tiny point estimates that are not plausibly different from zero.

Overall there are four serious problems with this study:

1. The data are a set of surveys conducted by the payday loan funded non-profit. This naturally leads to questions about explicit or implicit bias. The questionnaire is not reproduced in the paper and it should be.

2. Respondents to such a survey (especially the ones now excluded from the payday loan market) are likely to be predisposed to suggest that it has adverse effects on their financial situation. Thus the results would be biased toward findings that suggest restrictions lead to financial hardship.

3. The author finds, it turns out, that Oregon and Washington payday borrowers are not good treatment and control groups - the people that utilize payday loans in the two states turn out to be quite different. Efforts to control for these differences are unconvincing, which leads to biased results. [Note, however, that it is not clear in which way the bias would work and may in fact be a cause of the insignificant point estimates]

4. All statements about the adverse consequences of the decline in payday loans in Oregon are not supported by the evidence - they are suppositional.

I believe that restricting access to payday loans is bad policy, but I am still looking for good objective evidence to bolster my theoretical argument. This is a provocative start, but in my view, falls well short.

Goodbye TARP

Today, Secretary of the Treasury Hank Paulson announced that they are scrapping the plan to buy troubled assets from banks. It appears that they started to realized three things. One, the ability to come up with a true value for the assets was going to be very hard and take a long time (and speed is of the essence). Two, the amount of leverage used to buy these assets meant that the affect on banks balance sheets was going to be minimal. Three, these banks have not been using the government money they have received so far and instead have been hoarding it - this would likely be even worse if they bought the assets. Other problems included the incentive for banks to only sell their worst assets, the problem of a huge and costly program needed to resell the assets and the continued deterioration of the housing market on which these assets are based.

[By the way, to give credit where it is due, I was on OPB with Earl Blumenauer right after the TARP was first announced and his opposition to it was partly based on the amount of time it would take to do it. Off air, I disagreed arguing that the announcement itself would be enough to restore enough confidence to get markets unstuck. He was right, I was wrong. I have been consistently too optimistic about the crisis until recently...and now I am just depressed.]

Injecting cash into banks directly through the purchase of preferred stock is a better solution for all three problems - but there needs to be more than persuasion used to get banks to not sit on the money they get, something the government realizes and is trying to address. It is also a very good idea to exert more effort to stem the erosion of the housing market which is both at the heart of the crisis and where most less-affluent Americans are having serious trouble as well as shore up consumer credit where things like the drying up of funds for student loans is both immediately troublesome but also exceedingly worrisome for the future if students are being prevented from getting a college degree.