Portland Home Values: The May Case-Shiller Update

Portland home values, according to the Case-Shiller index, ticked up slightly in May compared to April (a 0.1% gain). This is not unusual, as the seasonal pattern of home values has, for the last two years and in the midst of the general erosion in home values, seen slight improvement in the May and June months. Still, it is better than continued decline. That said, the decline in home values from last May (2008) is over 16%, whereas the change from May '07 to May '08 was only a little over 5%, so the overall trend has been accelerated erosion in home values.

Have we hit bottom? Probably not. There are lots of distressed properties out there not yet on the market and lots of distressed families as evidenced by the high unemployment rate. Still, news that sales have picked up is encouraging, it at least shows that the combination of low interest rates and good deals in the housing market are driving activity. But we are a long way from the end in my opinion. I think the precipitous decline in home values is over, but it will be a while before we see any real appreciation.

For a nice look at home values and trends by metro area, the Wall Street Journal has an interactive chart. In general, as they have for a while, Portland and Seattle fall somewhere in the middle: not as bad as places like Phoenix, Las Vegas, San Francisco, Miami and Detroit, but worse than places like Dallas, Denver, Cleveland and Boston.

Do You Trust Markets?

Greg Mankiw has a nice post on trust in response to Paul Krugman's views on the government's role in health care. An excerpt:

I tend to distrust power unchecked by competition. This makes me particularly suspicious of federal policies that take a strong role in directing private decisions. I am much more willing to have state and local governments exercise power in a variety of ways than for the federal government to undertake similar actions. I can more easily move to another state or town than to another nation. (I am not good with languages.)

Most private organizations have some competitors, and this fact makes me more comfortable interacting with them. If Harvard is a bad employer, I can move to Princeton or Yale, and this knowledge keeps Harvard in line. To be sure, we need a government-run court system to enforce contracts, prevent fraud, and preserve honest competition. But it is fundamentally competition among private organizations that I trust.

This philosophical inclination most likely influences my views of the healthcare
debate. The more power a centralized government authority asserts, the more worried I am that the power will be misused either purposefully or, more likely, because of some well-intentioned but mistaken social theory. I prefer reforms that set up rules of the game but end up with power over key decisions as decentralized as possible.

What puzzles me is that Paul seems so ready to trust solutions that give a large role to the federal government. (In the past, for instance, he has advocated a single payer for healthcare.) I understand that trust of centralized authority is common among liberals. But here is the part that puzzles me: Over the past eight years, Paul has tried to convince his readers that Republicans are stupid and venal. History suggests that Republicans will run the government about half the time. Does he really want to turn control of healthcare half the time over to a group that he considers stupid and
venal?

These thoughts, I appreciate, are broad generalizations. They don't immediately lead to a specific set of reform proposals. But I wanted to give Paul credit for a key insight: A central question in this and perhaps other debates is, Whom do you trust?

Crocs

Why anyone ever thought Crocs were going to last and that investing in the company was a good idea is beyond me. Their demise was predictable. [HT: Eric Fruits]

And, no, I never wore Crocs: I am stuck in the 1980's college hippy time warp and still wear my Birkenstocks - though I have shed the VW Camper Van.

Is Oregon a Business Friendly State?

Yes, according to CNBC. Oregon comes in #18 in their rankling of states, and it would be higher if not for the terrible state of the state's economy and the horrendous state of the state education system. It is 20th in 'cost of doing business', 16th in 'access to capital' and 26th in 'business friendliness', 19th in 'technology and innovation' and 14th in 'transportation and infrastructure'.

What is troubling, however, is that the ranking of the state's education system has dropped from an already bad 29th in 2008 to 37th in 2009. And the fact that this is included in a "Top States for Business" ranking shows just how much education is important for business and the economy - not just for individuals.

Here is what CNBC has to say about education:

Education and business go hand in hand. Not only do companies want to draw from an educated pool of workers, they want to offer their employees a great place to raise a family. Higher education institutions offer companies a source to recruit new talent, as well as a partner in research and development. We looked at traditional measures of K-12 education including test scores, class size and spending.

And here are the education rankings. Hey, at least we are not Mississippi....yet.

Oregon's New Taxes and Economic Growth

The anti-tax forces are coming out full force to try and defeat the legislature's new taxes. I don't like what the legislature did - squandering perhaps the best opportunity to enact wholesale tax reform in favor of some band-aid, narrowly targeted new taxes - but I support them nonetheless as I believe the reality of deep cuts (in K-12 education particularly) would have been much worse for the future of the state.

There is no doubt that taxes are distortionary and create dis-incentives: in this case dis-incentives to start and invest in businesses and to locate and work in the state. Income taxes are particularly sensitive in this case, as Oregon already has some of the highest in that nation. By being an outlier, Oregon stands to loose out on skilled and entrepreneurial people who choose where to live (an argument for the diversification of revenue streams). Randall Podenza makes a good case against the taxes by emphasizing the dis-incentives that they create. Though I have some quibbles, particularly in looking at developing countries and their corporate tax rates and levels of investment - this is apples to oranges, and studies that show that taxes are distortionary are not particularly novel or helpful. The key is the cost of the distortion v. the cost of inaction in the face of a revenue crisis.

This is what is missing from this analysis: we understand the potential costs of the taxes, but what of the benefits (or perhaps more accurately - what of the costs of not adequately funding state services, particularly education)?

The rhetoric of the anti-tax types is now rising to absurd levels. Take, for example, today's op-ed in the Oregonian by Robert Millen, in which Mr. Millen paints a gloom-and-doom scenario: a little extra tax burden on top income earners will cause them to flee the state and destroy Oregon's economy! Please.

Millen states: "Recent studies indicate that this has occurred in the high-tax states of New York, Connecticut and New Jersey, all of which have experienced a net loss of high-income earners and the jobs their businesses generate." Which is a rehash of one of the most spurious arguments being employed, that since states in which raised marginal tax rates on high-income earners saw the number of millionaires decrease proves that the rich flee in droves to avoid taxes.

The problem with this is the fact that we are in the midst of the worst economic downturn since the great depression. There is a very good reason that there has been a net loss of high income earners especially, in this case, in the vicinity of Wall Street.

Millen goes on to state: "When our government raises taxes on the rich, their income tends to decline. For example, the last time the top rate was 50 percent, in 1986, the top 1 percent of income earners paid about 25 percent of all income taxes." This is not a statement about absolute incomes as he asserts, but of relative incomes, and of course the tax system is an integral part of relative income distribution. S0 the causal link is nowhere to be found - income inequality in the US has been increasing (why is a matter of some debate but a big factor has been the returns to higher education) so this statistic is completely irrelevant to the current discussion of marginal income taxes.

So what of a real cost-benefit analysis? Well, research on the effects of marginal income tax rates and growth in the US is minimal and flawed in general, due to the practical challenges of overcoming confounding factors that prevent the uncovering of a true causal link. For example, are high-tax, low-growth states low-growth because of high taxes or high-tax because of low-growth?

Nevertheless, I'll leave you with one (admittedly dated) study of the costs and benefits of taxes:

“The Effect of State and Local Taxes on Economic Growth: A Time Series--Cross Section Approach.” L. Jay Helms The Review of Economics and Statistics, Vol. 67, No. 4. (Nov., 1985), pp. 574-582.

Abstract

“Results based on pooled time series and cross section data are presented, which indicate that state and local tax increases significantly retard economic growth when the revenue is used to fund transfer payments. However, when the revenue is used instead to finance improved public services(such as education, highways, and public health and safety) the favorable impact on location and production decisions provided by the enhanced services may more than counter balance the disincentive effects of the associated taxes. These findings underscore the importance of considering the incentives provided by a state's expenditures as well as by its taxes.”

Emphasis mine. The point is that the new higher corporate and high-income taxes are costs to businesses and entrepreneurs, if they are spent well, the also create benefits to the same. In addition, those investments in the health, education and infrastructure of the state are vital to long-term growth and prosperity.

So, though I would have preferred for the legislature to have set about trying for wholesale reform of the state tax system, repealing the tax increases, flawed as they are, would be a mistake in my opinion. Hopefully in the future, the state can address its revenue system in comprehensive manner, until then, we cannot dis-invest in the future of the state and its children.

Beeronomics: Oregon Brewers Fest

Its Friday, sunny, and the Oregon Brewers Festival is on - what are you doing reading a blog?

I could wax economic about optimal beer company strategy, the state of the craft beer industry, but now is simply the time to go forth and enjoy the bounty. Read this and you are ready to set out for Waterfront Park.

In Praise of Mark Thoma

By the first time I met Mark Thoma, at dinner after a seminar at the U of O economics department, I had already become an avid reader of his blog. Of course, given his status of a blogger, I assumed he was introverted and anti-social - "uh oh" I thought, "there goes dinner." But I found out that my preconceptions were entirely misplaced, I was a little embarrassed to say to him that I was a big fan of his blog, but he was both delighted and delightful. Then, as now, I couldn't quite understand how he managed to do it. For anyone who has visited his site, Economist's View, you'll understand what I mean. It is a one stop site for just about all that is important in economics journalism, opinion and research - visit there once a day and you don't need to go anywhere else. Anyway, I couldn't help but ask him how he does it. He looked at me and said quite simply, "I don't sleep." I think he meant it.

Anyway, his efforts have not gone unnoticed, he is one of the most popular economics bloggers in the world and recently he has been profiled in the Wall Street Journal as one of the "Stars of the Blogosphere." And recently another of my favorite economics bloggers David Warsh, author of Economic Principals, authored a lengthy profile of Mark and his blog. Here is a taste:

But Thoma is the most nearly perpendicular of them all. He stands at a right angle to the plane of mainstream debate, selecting and presenting the various arguments fully and fairly. Anybody who builds anything knows that trueing things up – making them level, square, concentric, or, in this case, fair and balanced – is a crucial step along the way. Nobody does a better job of digesting online economic commentary than he does.

It goes on at some length and is well worth a read. Mark has really cornered the market in the blogosphere as the economic content aggregator. When I considered starting this blog, I understood that I could never attempt to do what he does, and I consciously don't try. My aims are much more modest as is my contribution. He was quite gracious when I told him about starting my blog, but more importantly, he was one of my main sources of inspiration.

So thanks Mark, for everything.

MLS and The Beavers: Can it Still be a Public Good if it is For-Profit?

The Oregonian has the news that Beaverton has expressed interest in being the new home of the Portland Beavers. This makes a lot of sense and seems to be the best of a host of second-best alternatives (what exactly are we going to do with the Memorial Coliseum that we hadn't thought of before?). I am not sure why it is necessarily better than Lents except it would be Beaverton, not Portland partnering with Paulson.

In the same article the O reports that the plan to renovate PGE Park will come before the city council on Thursday for a vote, and it appears that everyone on the council is reasonably happy with it given that it does on include new urban renewal funds. Thus Portland is one step closer to the reality of MLS.

All this is interesting in its own right, but not what really strikes me, what strikes me is the many commentators who think that public goods and private ownership are incompatible. Most Oregonians would probably accept that art museums, cultural facilities, zoos, science museums, etc. are all important public goods and enhance the lives of most residents of a city and a state. The fact that they have a large positive externality argues for government participation in these activities. But spectator sports also have a positive externality - just look at how many people showed up to support the Blazers for simply making the playoffs. [Of course this externality can be negative, witness the JailBlazer era]

Just because wealthy owners like Merritt Paulson are in it for profit does not mean that there is no public good aspect of spectator sports, nor does it necessarily mean that such sports would exist without public involvement. But I do understand that it is as much about perception as anything else. Still, though there may not be any great economic growth enhancing aspect to spectator sports does not mean the city does not benefit from their existence.

By the way, not to be too anglophilic, but my suggestion for the MLS ready PGE park (other than real grass) is to have a big sign in the rafters saying "Welcome to Goose Hollow" in the tradition of many English clubs that are defined more by their neighborhoods than by their cities.

The Anti-Stimulus That's Bigger Than the Stimulus

I am back, but still in semi-vacation mode, so I'll punt this one to James Surowiecki of the New Yorker. He makes the point I have made many times - without block grants to the states to counter their collapsing revenues, the federal stimulus is simply a weak swimmer against a strong tide. There is one small silver lining he does not emphasize: if we are left with a better infrastructure, this will, in some small way, aid the recovery.

The most interesting part of the article to me is this bit:

Much of the tens of billions of dollars that will be spent on roads, for instance, will be funnelled through the states. As a result, a disproportionate amount of the money will be spent in rural areas (which exert disproportionate influence on state governments), leaving cities—which happen to have most of the people and most of the traffic—shortchanged. The top eighty-five metropolitan areas in the country are responsible for about three-quarters of the country’s G.D.P. Yet less than half of the road money will be invested there.

I have an economist friend whose pet peeve is all the ways we, as a country, subsidize rural living - no doubt this will displease him. But I wonder, goods have to get from metro area to metro area, so don't they often travel through rural areas? I am not sure a comparison of GDP is the right metric here. I am not convinced that rural stretches of interstate are less important than urban stretches.

Economist's Notebook: Trees

As an economic naturalist I often wonder about the economic forces that have lead to come observable outcome. One such phenomenon which I have always wondered about are street trees: for what reason do wealthier neighborhoods of similar vintage have an amazing canopy of giant trees while more modest neighborhoods do not?

One only has to walk from, say, Buckman to Laurelhurst or Westmoreland to Eastmoreland to observe this phenomenon. I am sure the answer is pretty simple, but nothing obvious comes to mind without some objection from the recesses of my mind.

So, were trees that expensive back when the neighborhoods were built? Is it the difference in proper tree maintenance over the years? Some other reason? What?

I leave it to you, dear readers, to set me straight...

Indeed

Photo: The Oregonian

"It is not so much the sight of immorality of the great that is to be feared as that of immorality leading to greatness"

-Alexis de Tocqueville 

Democracy in America

New Poll! Right Track/Wrong Track

I have a new poll up. I am curious to know (in general terms) if you think the federal and state response to the recession are appropriate in the context of the Oregon economy.  I use the pollsters favorite right track/wrong track language for no real reason except it sound "poll-ish."

You have until the end of the month to weigh in.

Oregon Unemployment: 12.2%

Oregon's unemployment rate remained unchanged at 12.2% in June, but non-farm payrolls continued to shrink by 7,200 jobs.  

No real light at the end of the tunnel here, but I am still hopeful we'll see net job creation by the end of the year.  

Update: Perils of vacation blogging - I had incorrectly declared the unemployment rate 12.4%,it is 12.2% (May was revised downward).  Thanks to an astute reader who pointed this out to me.  

Farmer's Markets

A recent Oregonian article on the high prices at Farmers Markets raises an interesting question: just what are you paying for?  The Oregonian article focuses on the high prices charged at the market and how this compares to CSAs and supermarkets.  There is a long discussion of what the prices actually reflect, yet, interestingly, the discussion fails to mention (or at least explicitly couch it in terms of) the basic economic concept of supply and demand.  

The demand for farmer's markets comes from people who want to consume the food that can be purchased there, but it also comes from the desire to attend an enjoyable open air market, to interact with the people responsible for growing the food, to be able to select the best possible quality and to support local agriculture.  

On the supply side, the cost of providing produce to a farmer's market can be higher because of a lack of effectively taking advantage of scale efficiencies, cost of time and transport to attend the market and the extra cost of selecting the highest quality from among your crops.  

Put these two together and there is little mystery why farmer's market prices are higher in equilibrium than in a supermarket, and nothing sinister either: What we pay for as consumers is a lot more than just a commodity.  

Vacation Post

Still on vacation - here is the iPhone picture to prove it.  

Have collected a number of idea for future posts will try to have a few out this week, now that I have a bit more internet access.  

Stay tuned.

Beeronomics: Employee Owned Companies

Yesterday, Full Sail Brewing celebrated 10 years of employee ownership. They have a lot to celebrate. Full Sail appears to be thriving largely because they seem to have an exquisite sense of the market and have made some pretty savvy commercial decisions that seem to have worked out very well (e.g. the logo and packaging redesign of a few years ago - including the cringe inducing "Brewed to Stoke, Stoked to Brew" slogan - and the successful release of Session). Of course, they also produce excellent beer... But should we expect employee ownership to make a company like Full Sail more or less commercially savvy?

Economists in general have always been fairly skeptical of employee owned companies. The dominant theme in the literature is generally that the incentives of employee owners are to reward themselves at the expense of the firm and to be more interested in the short term success of the company than its long term growth, as well as to have too diffuse a decision making structure and to have too little independent supervision of employees. For example, can employee owned companies make the hard decision to cut positions in economic downturns?

On the other hand, employee-owned companies can be seen as a solution to a classic principal agent problem in that they tie employee compensation to the economic success of the firm. In this theory, employees should be more motivated, disciplined and productive as they understand that their effort is directly linked to firm performance. This incentive is amplified for smaller companies. [One reason why economists tend to be skeptics is that this incentive is often pretty small at the individual level, so would seem to be dwarfed to the incentive to give yourself a big raise regardless of firm performance, for example]

So is Full Sail the exception the the rule or a classic example of the sensibility of employee ownership? Well, it turns out that almost every study of employee owned firms has found that they are either no worse or slightly better than non-employee owned firms in terms of firm performance. [See this nice meta-study for some evidence] It appears that ownership in companies can, in fact, boost firm performance be giving employees a larger interest in the success of the firm.


It is particularly interesting that in an industry that is artisanal in nature this should be true - you might expect another tension between making distinct beers with small market potential and more mainstream beers. Full Sail seems to be mastering both, they were pioneers in developing the more macro-style 'Session' beers, and yet produce some of the most distinctive beers in their 'Brewmaster's Reserve' series. How much does all this have to do with being an employee-owned company is impossible to say, but perhaps it is not too surprising after all.

Regardless, here is to another 10 years of success to Full Sail. Cheers!

US Unemployment Rises to 9.5%

Though a lagging indicator the fact that the US unemployment rate has risen to 9.5% on the the wave of another 467,000 job losses is a pretty dismal showing for an economy everyone thought was starting to bottom out.  It still may, be but the number of job losses is still very severe - quite a bit higher than most economists were hoping for.  This graphic from the NY Times does a nice job showing the reversal in the local trend.  Average unemployment spells are increasing and wages are flatlining - raising real fears of deflation. 

This will inevitable lead to questions of whether the stimulus plan is working and whether it was a good idea.  I'll be another of the many commentators that remind you that the bulk of the stimulus money has yet to be spent, it will be over the next six months and beyond where it will have its effect.  I will, however, harken back to something I said quite a while ago, which is that the stimulus spending, while a lot of dough, is probably woefully insufficient, and that our ability to spend such money quickly and effectively makes me a bit of a skeptic.  I believe in the economics behind the theory, just not in the politics and bureaucracy behind the reality.  

What this national number means for Oregon is pretty depressing: already with a shockingly high unemployment rate, Oregon looks to get still worse in the next few months.  And though I didn't chime in on this debate as it was ongoing, I share the Governor's caution when it comes to spending and the economic prospects in Oregon, however, I think the legislature did the right thing.  Pre-commitments are important signals about the values of the state, and pre-committing to a school budget that is not criminal is the appropriate thing.  Our future lies in the human capital investments we make today.

Notes on Blogging and Fish and Chips

You may have noticed already but the next couple of weeks will be a bit light on the blogging front as I am on vacation and I am about to go to a place next week where there shall be no (gasp!) internets.  Bear with me.  I might be able to text a post or three.  

On the fish and chip front (as I know you are anxiously awaiting my latest dispatch), as a part of my vacation, I recently sampled the fare at the McMenamin's Edgefield Pub.  It was a disaster.  Overcooked rubbery fish and soggy fries.  What a disgrace to all of fishdom - to think that a poor fish gave its life for that.  Sigh.  The rest of the visit was wonderful, however, and I was pleasantly surprised with the quality of their IPA which I haven't had in years, it was really tasty.  But I must now sadly place McMenamin's on the black list for fish and chips.

On a brighter note, have now had the F&C at the New Old Lompoc's Oaks Bottom Public House on several occasions and can now say with confidence that they are consistently superb.  I have not tried them at their other locations, but I will assume that they are good unless proven otherwise.

So you want good F&C in Portland? I recommend The Fish and Chip Shop for traditional English finger style (think batter) and the New Old Lompoc empire for exceptional pub style F&C.

Eco-nomics: Urban Centers Growing

The Wall Street Journal has an interesting article about the relative increase in the size of cities proper versus their suburbs.  Their economics blog also discusses it.

Why is this happening?  I can think of three reasons (all touched on by the article and discussion):

1) The real collapse of housing has occurred in the suburbs.  So people who have lost homes and people who might have considered buying homes in the suburbs are moving back/staying in the city proper.

2) Economists have a term called agglomeration externalities that is a bit of a catch-all term for all of the benefits of a lot of and/or concentrated economic activity.  Central cities might be a bit more recession resistant due to the concentration of population and economic activity.  

3) Many cities have gone through a central city renaissance making them more attractive at the same time that dense living has become a bit of a virtue (or at least an ideal), and at the same time that economic factors (high gas prices, for example) have increased the cost of living in far out suburbs.