Feldstein: Avoiding a "Deep and Prolonged Recession"

Marty Feldstein says it's time to dampen the downward movement in housing prices to prevent overshooting the bottom, and to use government spending, including spending on infrastructure, to try to avoid a deepening recession:

The Stimulus Plan We Need Now, by Martin Feldstein, Washington Post: Further legislation to deal with the economic crisis should not wait until the new president takes office. Fortunately, the president-elect will be a senator and can propose legislation... Immediately after Nov. 4, the winner could, and should, take the lead in the legislative process.

The economy faces two separate problems: the downward spiral of home prices ... and the decline in aggregate spending, which could cause a deep and prolonged recession.

Home prices ... must fall an additional 10 to 15 percent to get back to pre-bubble levels. But they could fall much further than that as a result of mortgage defaults and foreclosures. ... Congress should enact policies to reduce defaults that could drive prices down much further. ... The mortgage replacement loan plan that I suggested on this page in June ... is one possible way to do that. ...

With the Fed's benchmark interest rate down to 1 percent, there is no scope for an easier monetary policy to stop the downward spiral in aggregate demand. Another round of one-time tax rebates won't do the job. ...

The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags... But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.

A fiscal package of $100 billion is not likely to be large enough... The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.

The president-elect should focus on ... initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. ...

The increased government spending should include not only money for infrastructure such as bridges and roads but also for a wide range of equipment. Rebuilding some of the military capacity that has been depleted by the wars in Iraq and Afghanistan could be done relatively quickly and should be part of the overall package.

Although the economy is facing severe challenges, the president-elect can turn the situation around by introducing legislation to deal with the downward spiral in home prices and with the declining level of aggregate demand ... as quickly as possible.

Since I've made many of the same points, it would be hard to disagree with the overall message. One thing though, the military will get its share one way or the other, so I'd rather see the increased spending directed elsewhere. Things, for example, "that would otherwise not be done."

Update: GDP falls in third quarter:

The Commerce Department reported this morning that consumers sharply cut their spending this summer, causing the United States economy to shrink at annual rate of 0.3 percent. By almost all accounts, the economy is now in recession.

The last quarter in which consumers reduced their spending came in 1991. ... Personal consumption fell at an annual rate of 3.1 percent in the third quarter of this year, its biggest drop since 1980, when the economy was in a deep recession. ...

Comments

[Gegner]

Mr. Feldstein's argument misses the mark but several nautical miles.

Yes, there is a definite need to increase labor force participation but 'bridges to nowhere' are hardly an effective/productive solution.

Worse, paralyzing the nation's interstate network is hardly 'fuel efficient'.

The world's governments are already flooding the global economy with 'liquidity' which will eventually need to be 'mopped up'.

While the central banks have the ability to 'negate' this excess funding, it is far more likely that it will be 'absorbed' through higher prices.

Which will, in turn, put pressure on wages.

Which will lead to even higher prices.

As many commentators are saying, it is difficult to imagine that creating MORE credit is the answer to a problem that was created by excessive credit.

Worse, this nation no longer possesses the physical capability to put millions of people back to work.

The old assembly lines and production facilities have been torn down, sold off or scrapped.

If we were to pursue the 'busy work' strategy that was pursued (successfully) during the first Great Depression, we would quickly find ourselves in a Zimbabwe-like economy.

We can obviously no longer afford to import our economy and we no longer possess the necessary equipment to produce these thing for ourselves.

That's the big difference between 'then' and now. Then we produced wealth with which to 'offset' deficit spending, now we don't.

We could turn this around tomorrow, but it appears the 'political will' to do so is lacking...

[Lafayette]

Nobody likes the hangover

Feldstien: Home prices ... must fall an additional 10 to 15 percent to get back to pre-bubble levels.

Bollocks. How does anyone know how much prices must fall? (His guess is as good as Joe & Jane Sixpack.) Better that we should know how much they should reasonably increase in normal times -- and these are far less than normal times.

Where were the Voices of Wisdom during the frenzied market bubble? We took three to four years to get into this market miasma, quite blithely I might add. Everyone enjoyed the asset bubble, didn't they? Now that the party is over, nobody likes the hangover.

How about a bit of laissez-faire? Which is French for "leave the market alone". Market prices are the symptom of illness not the illness itself.

The illness is insufficient market demand. Which is cyclic, meaning it is and will continue to correct itself. But, it will take a while to deploy. Let's be patient and not panic.

And it's time to pay the price for mindless binging. The lesson is in fact salutary -- a shame we cannot teach future generations. Let the market correct itself. It usually does.

If we are feeling sorry for Americans caught in the bubble with negative Net Asset Worth and they are at the verge of foreclosure, then let's find a way to address THAT problem.

Leave market prices alone. As said above, they are the symptom of a malaise and not the systemic cause. Let's get the economy right and the rest will fall, more or less, into place.

Anyone for a good boost from a Keynesian Expansion by means of Federal expenditure? Then we can get back to the nitty-gritty of fixing the thousands of little things wrong with the American economy in general -- starting with Income Inequality and putting back up marginal tax rates in a permanent manner.

We've undergone a pandemic of greed. The best medicine for cupidity is higher marginal income taxes. That's a no-brainer.

[Lafayette]

En passant

"IF" by Rudyard Kipling

If you can keep your head when all about you

Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you
But make allowance for their doubting too,
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise.

If you can dream--and not make dreams your master,
If you can think--and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools:

If you can make one heap of all your winnings
And risk it all on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on!"

If you can talk with crowds and keep your virtue,
Or walk with kings--nor lose the common touch,
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much,
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And--which is more--you'll be a Man, my son!

[Richard H. Serlin]

As I wrote previously (http://economistsview.typepad.com/economistsview/2008/08/wishful-thinkin.html), "Lowering of housing prices, over the long run, does immensely more good than bad.". There are far better ways to deal with the financial crisis.

Harvard and Wharton Economists Edward Glaeser & Joseph Gyourko agree in their excellent new Economist's Voice article, "The Case against Housing Price Supports" at: http://www.bepress.com/ev/vol5/iss6/art3/. A sample:

The underlying logic behind these proposals
seems to be that since housing price declines are
at the root of the crisis, the only way to fix the
crisis is to stop housing price declines. This reasoning
is as flawed as thinking that the best way
to help a roulette addict who loses his house by
betting on red is to get at the root of the problem
by ensuring that black comes up less often...

The real problem, then, is not the price
decline, but the previous price explosion. While
we certainly do not believe the government
should intervene to stop price increases in free
markets, there is no reason to hope that people
should have to pay more for any basic commodity,
whether that commodity is coffee, oil or
housing. It would make more sense for the federal
government to try to reduce the supply-side
barriers that keep house prices artificially high
in some markets, rather than to try to artificially
inflate prices.

End Quote

[Oupoot]

Recently heard that housing (and property in general) is actually a super or hyper durable good. Whereas cars and normal durable goods has life cycles of 5-10 years max, housing (property) is 20-40 years. Thus, as Lafayette says, it will take time for the over supply of housing to be absorbed by demand. But given the current conditions, it will take longer than normal for demand to catch up, with supply likely to be severely depressed for a long time. My guess it will take 5 - 10 years for the housing market to "stablelise", i.e. demand and supply to get back into sinc, but it will not be at pre-bubble levels, whatever or whenever that is/was.

One way to get a quick fix solution to the housing dilemna is to artifically boost demand, but this is not a good idea given the current problems that has resulted from boosting demand artificially with low credit.

The other quick fix solution is physically destroying houses, i.e. taking about 1 million houses completely off the market. The option is only whether to destroy new houses (less than 5 years old) or old houses (older than 30 years) and how to do it. It may actually be the less painful option for the economy: boosting demand for destruction jobs and shorter distressed period for supply of housing industry.

[Economist]

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[reason]

Serlin is on the money. Treating the symptoms is treating the symptoms. I would like to see a recognition that the root cause is the unsustainable US trade deficit and the lack of growth in median incomes. Debt based growth must be replaced with broadly based growth. Debt based will collapse as soon as real growth disappoints because it implies widespread bankrupcy. It is fundamentally unsustainable. Nothing less than a root and branch international financial reform will do.

[Richard H. Serlin]

Ok, I just read the whole thing. First, I was very happy to see Feldstein, a long time Republican, admit, "The only way to prevent a deepening recession will be a temporary program of increased government spending.", and, "While it would be good if some of the increased spending also contributed to long-term productivity..."

I also saw that Feldstein is not concerned with housing prices dropping in general, just with them dropping only temporarily in an unsustainable reverse bubble. This is a stronger argument for some kind of price support program, but I don't think it's strong enough. It's probably not worth the costs of intervention to guard against this.

Plus, there is a substantial learning value to a reverse bubble anyway, to really teach people that homes are not a super safe money machine, and you should consider buying a more expensive home a cost, not an investment -- you get the same benefit of not paying rent from a $150,000 home as you get from a $250,000 one, but you would get a much better risk adjusted return from investing the additional $100,000 in a well diversified stock portfolio than in a bigger house. Historically, home price appreciation averaged just 0.4% above inflation, even less when you include the cost of maintenance. Stocks, on the other hand, have returned about 7% above inflation.

[Beezer]

Somewhere in my memory I have the nugget that "it's not what government borrows, it's what government spends," that represents our future danger.
With all the spending and borrowing going on at the moment, and potentially much more borrowing and spending to come along, what are the techniques to be used to cut spending?

[reason]

Beezer
I'd get a new memory.

[ken melvin]

With the 'bubble' fairly isolated (Fla, CA, AZ and NV) and given that it's not really the problem so can hardly be the solution; we need think ahead to spending on the 'new' economy and the new infrastructure. Be good to spend on transit, power grids, alternate energy, remedial environmental, quality of life, and such, methinks.

[anne]

"Somewhere in my memory I have the nugget that 'it's not what government borrows, it's what government spends,' that represents our future danger."

Care to explain precisely what this means, since I am all anxious to find out just what sort of government spending is so bothersome.

[anne]

"Yes, there is a definite need to increase labor force participation but 'bridges to nowhere' are hardly an effective/productive solution."

What nonsense, the implicit assumption by wild conservatives that it is never possible to build bridges to somewhere, somewhere important.

[anne]

"If we were to pursue the 'busy work' strategy that was pursued (successfully) during the first Great Depression, we would quickly find ourselves in a Zimbabwe-like economy."

This is a shameful vile lie, a lie meant to distort history making meaningful present policy impossible.

[anne]

http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an.html

January 10, 2007

The New Deal and the Great Depression

Rates of Unemployment

1929 -- 3.2%
1930 -- 8.7%
1931 -- 15.9%
1932 -- 23.6%
1933 -- 24.9% (20.9%) Roosevelt era begins, March
1934 -- 21.7% (16.2%)
1935 -- 20.1% (14.4%)
1936 -- 16.9% (10.0%)
1937 -- 14.3% ( 9.2%) Recession begins, May
1938 -- 19.0% (12.5%) Recession ends, June
1939 -- 17.2% (11.3%)
1940 -- 14.6%
1941 -- 9.9%

Numbers in brackets correct for employment in New Deal programs.

Thomas M. Geraghty
University of North Carolina

[anne]

http://www.huppi.com/kangaroo/Timeline.htm

The New Deal and the Great Depression

Rates of Contraction & Growth

1930 - 9.4%
1931 - 8.5
1932 - 13.4
1933 - 2.1 Roosevelt era, contraction ends
1934 + 7.7
1935 + 8.1
1936 + 14.1
1937 + 5.0 Recession begins, May
1938 - 4.5 Recession ends, June
1939 + 7.9

[bakho]

"Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags."

Data Please.

The data show that SOME infrastructure projects take too long to initiate to be effective stimulus and OTHERS are ready to go forward today.

How hard would it be to appropriate money that would go to the states on a formula basis that would have to be spent on infrastructure or renovation projects that are initiated in the next 3-6 months? Just because past programs have long lags does not mean that all programs must have the same lags.

[bakho]

"Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags."

Data Please.

The data show that SOME infrastructure projects take too long to initiate to be effective stimulus and OTHERS are ready to go forward today.

How hard would it be to appropriate money that would go to the states on a formula basis that would have to be spent on infrastructure or renovation projects that are initiated in the next 3-6 months? Just because past programs have long lags does not mean that all programs must have the same lags.

How about some busy work like replacing heating and cooling systems in old buildings with fuel efficient units? How about repairs and renovations that are "stitch in time saves nine" projects? There are a lot of projects that are ready to go that are meaningful but lack the funds.

[a]

"Home prices ... must fall an additional 10 to 15 percent to get back to pre-bubble levels. But they could fall much further than that as a result of mortgage defaults and foreclosures. ..."

This is ridiculous beyond belief. So Feldstein, who never called a housing bubble until after it had burst, is now claiming to know where the bubble started and how much house prices should go down to be back at that level. On the contrary, the economy has become so leveraged and there is so much debt, it's hard to say where the bubble started and how much prices should go down. Using 2001 as a base and 1982 as a base, give vastly different results.

[David Heigham]

Marty's prescription is all desirable. The question is how far the detail is practicable.

The point of limiting the overshoot in the house price fall is to prevent consumers' and banks' balance sheets looking and feeling worse than they need to be. The nature of the housing market - housing is not a homogeneous good, each house is different - means that you can only tune this adjustment very roughly.

The only way to boost public spending quickly is to pass the money to the institutions who have projects ready to go (and tell them that they lose the money if they do not spend to time). In the USA, that will mean passing a lot of the money to state and local government; as well as to military procurers. You have to take pot luck on whether the spending turns out to be productive (even the "bridge to nowhere", if it is really fully designed and ready to go, should be built) or saves what you would have to spend sometime (military procurement ready to go to contract will include some stuff that will only move from the military warehouses to the scrapyard as well as quite a lot of things they really need).

And so on. With concentration for next year on getting useful spending ready to go.

But the quicker we get on with this messy process, the lower is likely to be the eventual economic cost.

[anne]

Mark Thoma:

"One thing though, the military will get its share one way or the other, so I'd rather see the increased spending directed elsewhere. Things, for example, 'that would otherwise not be done.' "

The general staff is even now asking for 20,000 rather than what was recently 10,000 more soldiers to be sent to Afghanistan, while Barack Obama has promised to increase the size of the military by 100,000. The Secretary of Defense is now asking for tens of billions of dollars in additional spending on "modernizing" our nuclear arsenal since the arsenal has evidently become ever so much less than modern.

We are only beginning to learn of coming requests or demands for increased military spending that will be exceedingly difficult to limit.

[Increase Productivity]

"While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand..."

Since the resources to increase spending are being substantially borrowed from overseas, it is extremely important to increase productivity with the spending. Otherwise, servicing the loans may become problematical. Don't waste the spending, or future borrowing to keep Social Security/Medicare going over the next 50 years may become a real challenge. If there is a serious national emergency on top of it, borrowing to fund it may be impossible.

Wasting enormous resources in never acceptable.

[hari]

Q' of guns vs. butter?

It's time to freeze, completely freeze (Yes!) the defense establishment and establish a national security legislation against deploying combat forces/weapons abroad in search for another *hussein* or *bin laden* or whatnot.

Current Budget must discover the plight of the common citizen and facilitate his/her average consumption, health and welfare. That shld be the priority right now - nor military might and its consequences to budget.

[robertdfeinman]

I keep having thoughts of a medical analogy. The patient is suffering from a cancer (militarism) which just keeps growing and devouring ever bigger portions of the discretionary federal budget. Meanwhile all the attention is focused on a highly visible, but easily treatable skin rash (housing).

Obama has spoken of the $10 billion per month going to Iraq, but all he seems to want to do is redirect the money to other military causes, like Afghanistan. This is not promising.

Even when there is talk of increased domestic spending on "infrastructure" it is to be financed by running up the deficit or printing money. There is no thought of talking funds away from the cancer. To complete the analogy we all know where uncontrolled cancers lead. This will be China's century not the US.

[Inflation is the Enemy]

"Current Budget must discover the plight of the common citizen and facilitate his/her average consumption..."

The best way to help the common consumer, and stimulate their spending, is to let prices fall. On most product supply/demand charts falling prices lead to greater quantity sold. Consumers can buy more when prices fall.

[paine]

as might well be expected
the anal blockheads are out in force

flock yaking at uncle marty
for suggesting we put a false bottom on
the nation's various local
residential lot value structures

well uncle marty wants as much usury juice squeezed out of
us as possible
its about the debt payments fellers

prop the lots and walk away becomes less likely eh ???

mustn't let the booboise in on the credit rating sham

yup don't let em know there's life after default

must keep the debt smurfs at max
its good for job effort
much like long unemployment lines
and vicious beveridge ratios

on the sunny side of main street
bashing down these monthly nuts
means restructuring the debt

policy choices
cut the prin
or
the rate
or any combo there of
so long as the umbilical cord
to the usury/credit system remains intact

cash economy only
fit for wage laboring alone
type savages
lurking sourly
in a rookery of sro's
are a horde
if it swells hugely
is a horde respectible citizens
oughta beware

[hari]

A very good suggestion for MT - in this connection - is to compare the fiscal legislation which Merkel is trying to finalize and present to the Reichstag for decision, may be next week.

Interesting - todays employment report from Germany is positive. Namely, employment policy is still working...but next report will be the watershed this business cycle, they think.

[Winslow R.]

rdf:"I keep having thoughts of a medical analogy. The patient is suffering from a cancer (militarism) which just keeps growing and devouring ever bigger portions of the discretionary federal budget"

Some how the cancer analogy doesn't quite work as the military is used to protect resource flows as well as consume them. Though war is ugly, defense is needed.

The shield provided by the military is shiny amour that is necessary and costly and so should be minimized. How about investing in local resources for the patient (renewable energy) to minimize the need for extended shielding that encroaches upon others sovereignty?

[paine]

instead of props to lots with zero intrinsic supply cost

lets build a new transportation and energy industry

verdically integrated
ie
we have the whole subsystem
existing well within our own domestic
reproduction system

lets build or convert some urban housing
for wage smurf outfits to reside in

maybe have a plan to make real
a guarrrrrrrrrent-eeeeeed
minimum reidential dwelling
for all legal us residents

[paine]

willful elitest ignorance
is the enemy not babbit bait rattle
about " inflation"

[ken melvin]

Passingly strange that 'they' would have wages go down so as to make us more 'competitve' whilst housing goes up to improve their assets.

Some choices shouldn't be. While true it be that military spending uses up excess productive capacity of which we have aplenty, it is otherwise a complete waste of wealth, resources, living standards, lives, ...

[Winslow R.]

Paine wrote: "yup don't let em know there's life after default

must keep the debt smurfs at max "

Yes, I see Feldstein's proposal as contractionary, benefiting banks, as is Sheila Blair's proposal.

Current situation
Replace 12 months of rent-free living followed by life in a rental at market rates...

Proposed situation
with a 5 year maximized burden followed by a sudden reset.

[paine]

"Obama has promised to increase the size of the military by 100,000"

good emperor mind set revealed anne

more boots less bombs
an infantryman
kicking in a door
that's the ultimate smart weapon

u prog pond near left types
need to take this lead
from us much farther left types

obama is no friend of
unconditional national self determination

like st woodrow
emerging nations will get to determine their fate
just so long as they
satisfy ob's humane metrics

evil emperor presumptive
air pirate darth McCain
at least lets you know what's in store
for u elite erasmians
if the genesis block
of
romish sedulates and protskites
elect him our next CnC

[Inflation is the Enemy]

"...lets build or convert some urban housing
for wage smurf outfits to reside in..."

We would have that without non safety zoning regs that mandate only 200K plus McMansions can be built. In the 1960s, brand new working class homes sold for the CPI adjusted price of about 65K. If brand new 65K homes were allowed to be built today, we smurfs could readily afford them. Bring prices down to affordable levels already.

[paine]

ther's an old calc somewhere
that suggests

if hoover the herbert
in 1930
borrowed the full value of every
state and local budget
sent to proceeds to those authorities
only on the proviso they had a full tax free year
inside their jurisdiction
the great big D
would have been averted
and all would have flowed on like the great mississippi
cash floods binge fun and consequence less
foolery for all

[Lafayette]

Serlin extract: there is no reason to hope that people should have to pay more for any basic commodity,
whether that commodity is coffee, oil or housing

An economist wrote that housing was a commodity? Oh, wow.

Housing is not even commodity-like. It is not uniform, not plentiful, planted but not harvested, and comes in a great many different tastes.

It is more a high-tech product than akin to rapeseed in terms of availability, volume pricing and usage. It's availability does not depend upon the weather or extraction technology. It is heavily labor intensive.

It's usage is to provide physiological protection (from the elements) and personal safety as well as comfort. It is therefore a Basic Human Need, not quite like air or water, but very much like food.

But, it cannot be treated as a commodity -- and I doubt seriously that higher housing costs are due to regulatory constraints. Many of those constraints are in place for ecological purposes -- for instance to assure that effluents do not pollute the water table.

[paine]

inflatio

you have the spirit but not the science of a progressive
instead of just building volks apartment
condo blocks
to sell at subsidized prices

i suggest we try raising the market value of wages
by raising wage related income
not lowering wage related prices
thru a massive recycling of the SSI surplus
back thru the wage system as a earned income tax credit plan
of mammoooooth proportions

[Inflation is the Enemy]

"...only on the proviso they had a full tax free year..."

Yes, state/local taxes tend to be very regressive, taking purchasing power away from the ordinary consumer. Get rid of all sales, property, and other taxes. This will put purchasing power in the hands of the ordinary consumer. Above all, get rid of the regressive inflation tax, which takes more purchasing power away from the ordinary consumer each and every year. Inflation is the primary reason one wage will no longer comfortably support a family, like one wage did back in the 1960s.

[paine]

laff
again you show a bouquet of smart blossoms

indeed commodity as we use it today
is a poor name for a house

and an even poorer name for a house lot

[Dunc]

A sustainable house price has historically been reckoned to be about 3.5 to 4 times the average industrial wage. I've no idea what the prices are like relative to wages in the US but in Ireland and the UK (the other Anglo Saxon economies) prices would have to fall by about 50% to return to historically normal levels.

[paine]

"and I doubt seriously that higher housing costs are due to regulatory constraints"

maybe no
but in the zoned zone
as paul the k calls our
housing froth spots
higher lot prices sure are

[paine]

dunc's brandishing the right yard stick folks

says...

"...you have the spirit but not the science of a progressive..."

The difference, as I understand it, is that I want both active workers and retired workers to have a higher standard of living. You seem to care very little about retired smurfs.

[paine]

"Inflation is the primary reason one wage will no longer comfortably support a family, like one wage did back in the 1960s."

inflatio
that's a function of stagnating real wage ratse comrade

the price level is like a skirt
is it long or short ??
depends on the legs

[paine]

ahhh inflatio
you are worried about the post job smurf life

indeed i've kinda let them drift

answers involve indexed annuities and pensions like indexed SSI's

[hari]

When I saw Clinton along side with BO last night - it was real magic - the few words they used to give signal to what's cooking (after the great decider leaves) was magic ...

and repeats the spirit in between Pines lines of argument.

I'm convinced there will be a fiscal stimulus to afford employment to the ransacked citizens of middle America.

[paine]

note the dismal facts

the new deal peacenik stage
was only able to
directly employ about 5%
of the employable force

nothing prevented that from being 15%
except the heinous inertia
of conventional wisdom

let's wonder
what todays CW inertial effect might prove to be

obama's mind is a rose garden of conventional elite wisdom

yes better then the pressed in paper victorian flowers
in McCain's head
but ....

i see great and needless sufferring ahead my friends

[paine]

"ransacked citizens of middle America"

nice phrase herr hari

they shall not be crucified on
a pallin cross of declined plastic

[Bruce Wilder]

Listening to NPR this morning, and they were reporting on a still to be released Treasury-FDIC proposal to guarantee 3 million mortgages.

Naturally, the narrative analysis focuses on the undeserving home "owner".

No analysis, whatsoever, of the moral hazard inherent in offering the banks yet another guarantee. Because, make no mistake, this proposal will be all about opening the door to having the government make good on 3 million bad mortgages.

This country is so screwed.

[reason]

Bruce Wilder,
I don't know if you read German but I just saw this.

http://www.spiegel.de/wirtschaft/0,1518,587446,00.html

Look there are some people sitting at the top of tower blocks who should be in prison.

[hari]

WP- Chairman of Economic Adviors advocates Banks which get handouts from Treasury shld be allowed to pay their normal dividents!

Wow! I simply can't trust the intelligence of Bush/WH.

[paine]

" make no mistake, this proposal will be all about opening the door to having the government make good on 3 million bad mortgages."

as usual bruces are wild
gets to the main action fast

its about the debt guys
if hank can't buy em at one end
he can save their face at least in part
at the other

nthe reason the corporate trolls
want to save these slackers home values
is not just for the f'in hut lot prop
in itself
but to prevent a default run of mounumental proportions
that smash thru
all these snidely whiplash paper tarrif barriers
to paygo rent world

there shall be no great debt shuck

[macburger]

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR2008102904533.html

Banks to Continue Paying Dividends
Bailout Money Is for Lending, Critics Say

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, October 30, 2008; Page A01

U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years.

The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don't serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.

Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends -- or conversely, why banks that need government money are still spending so much on dividends.

....

So, tell me again - why was this bailout required?

[Bruce Wilder]

At the end of the day, there are at least 1.7 million homes no one wants. If incomes decline by a bit, the number of "surplus" residences might be more like 3 to 4 million.

Those "surplus" houses are concentrated in places with high unemployment (Flint), and at great driving distances from employment (San Bernadino). And, maybe in places that are a tad overbuilt (Las Vegas). But, the point is, they tend to be locally concentrated, and in some local markets, they will drive down prices, no matter what. A government guarantee of five years on mortgages is just an open invitation to banks to off-load the mortgages-on-houses where foreclosure is simply never going to recover value. And, all the bank has to do is sucker some home "owner" that they suckered at least once before.

[bakho]

The median home price in Detroit is $79.9K
The median home price in FLint,MI is $55.7K
The median home price in Boston is $399K.
The median home price in San Diego is $351K. In May, 2006 it was $524K

Just a reminder.

[norm]

dunc

Here is a url for relevant information

http://calculatedrisk.blogspot.com/2008/06/update-
ratio-median-house-price-to.html

Nationwide in the US the historical average of the
median house price -to- median household income is 3.5

Likewise, the historical average S&P500 P/E ratio is 15, approximately.

Both ratios were extremely high during the big bubble. Now both ratios are returning to "normal", returning to historical norms.

[norm]

dunc

As bahko shows, local markets differ. The historical norm for median house price -to- median household income in San Diego and LA is 5, approximately. Prices here in San Diego are returning to that level.

All the foreclosures here are promoting a big increase in home sales, while simultaneously home prices continue to drop. Its a mad mad world.

[Lafayette]

mab: but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.

We were effed.

Like I said then, they put a pyromaniac in charge of the fire brigade.

They haven't the slightest shred of dignity left, this band of thieves. Uncle Sam, hang your head in shame.

[calmo]

norm, do you figure that this traditional ratio (5) should be carved in stone despite advances in technology and productivity?
How about across all incomes and shacks-to-mansions? Does this "median" measure conceal or reveal the real nature of the industry and the current morass?

[don]

Gegner and Reason, I'm with you. Hari and Macburger, I share your outrage over the use of taxpayer dollars to pay off bank shareholders, but I think even more worrisome is the tendency to maintain bonuses and overpayment to banking's elite.
Beezer, there is wisdom in your nugget - in line with the old saw about paving the road to hell.
Paine, I am simple enough to be occasionally confounded by your irony.

[paine]

mates
if you want to prevent a house lot bubble
then its going to have to be locally reg-ed
and taxed away as it appears

the cost of construction index oughta tell us
more or less where
the lot share in market prices is
at any point in time.... approximately
and some relative structure of lot values
oughta be an appraissors dream job

if its taxed it'll get domne seriously

and become an on going
feasible rough and ready construction
as the market for houses and lots chug along
any deviations in share
oughta get a look see
and a choke hold on mortgage qualifing
applied
till the lot value ratio is cleared
as strictly a relative ground rent change

obviously a confiscatory
lot value tax algorthim
which brings
lot values to zero everywhere
is the goal

you buy the house once
but you pay the lot tax quarterly

start from there

other assets other bubbles of course

gold oil equities they get nasty and crafty as you move toward
pure paper

a house lot in the middle of kansas farm land ???

[cm]

Bruce Wilder: "there are at least 1.7 million homes no one wants"

... at their current prices. I'm quite confident there is only a small minority among those that nobody would want at any price.

I would want a house where I now live. Only the arithmetic doesn't quite work, at my comfort level.

[paine]

not sure how many of you are familiar with
the ground rent notion
all ??some ??? few ???

it's a mind clearer
and a beautiful part of the science

models exist that loop transport infrastructure
into a confiscatory ground rent tax

perpetual motion lovely
like barro only lefty

my mentor bill vickrey was a master
at crazy ground rent tricks

[paine]

" I'm quite confident there is only a small minority among those that nobody would want at any price"

cm

yes spoiling the market is a "by who's lights" type of expression

one has to assume all j curves
like boomarangs come back around
at least as far as decent
mortgage to income ratios
will permit

if there's a real loss
it's 'cause the lot bubble was a ......bubble eh ??

so i say
free ride till the sheriff's deputy shows up ...then
walk away baby
none the worse for it

neighborhood effects ????

that's a gubmint problem
oughta be laws that say
the post eviction time frame
is x days till auction
and the property's condition at auction time
gotta be good
or the mortgage holder gets fined accordingly

then so what if it goes
at rock bottom pricesi
repeat:
let the creditors take all the loss

[William Hallowell]

Great piece. Interesting point about the military. The U.S. economy has surely taken quite a hit over the past few months. With a recession and the need for reform on the minds of a majority of Americans, I thought you might be interested in two non-partisan guides we’ve put together here at Public Agenda on the economy (http://publicagenda.org/citizen/electionguides/economy) and taxes, spending and debt (http://publicagenda.org/citizen/electionguides/taxesdebt). Feel free to check these out and get back to me with any questions. Thanks again for an informative piece!

[Too Much Fed]

"The economy faces two separate problems: the downward spiral of home prices ... and the decline in aggregate spending, which could cause a deep and prolonged recession."

WRONG!!!! The two PROBLEMS are too much aggregate spending is coming from TOO MUCH DEBT and NEGATIVE REAL EARNINGS GROWTH for most people!!!

[Too Much Fed]

The solution to TOO MUCH LOWER AND MIDDLE CLASS DEBT is NOT MORE GOVERNMENT DEBT, especially with a record amount of government debt and soon to be a record deficit!!!!!

[Too Much Fed]

"Yes, there is a definite need to increase labor force participation but 'bridges to nowhere' are hardly an effective/productive solution."

How about higher wages and real wage growth becoming positive EVEN IF that causes interest rates to rise???

[Too Much Fed]

"Where were the Voices of Wisdom during the frenzied market bubble?" (as in housing bubble)

Did greenspan silence them because he did NOT want price deflation and/or negative real GDP growth???

See this link:

http://online.wsj.com/article/SB120760341392296107.html

"At the time, Mr. Greenspan expected his policy to boost housing because the rest of the economy was relatively unresponsive to lower interest rates. Based on decades of his own research, he believed a buoyant housing market would spur consumers to borrow against home values and spend more. This would not produce a housing bubble, he predicted, because it was difficult to speculate in homes and the memory of the 2000 tech-stock bust remained fresh.

Mr. Greenspan now admits he was wrong about the improbability of a housing bubble."

[Too Much Fed]

So what if housing prices fall?

Do people buy cars expecting them to go up in price and be able to borrow against them?

Are higher housing prices really about enriching the bankers and using them to "trick" people into having nursing home insurance without realizing it???

From:

http://www.nytimes.com/2006/02/12/realestate/12home.html

"But under the new law, he said, a person with more than $500,000 in home equity is ineligible for nursing-home care under Medicaid. (Homes occupied by a spouse or a disabled or minor child are exempt. And the law allows states to increase the threshold to $750,000.)"

[norm]

calmo

You raise some good points.

The standard view is that the historical norm represents house prices that a majority of households can afford.
Also, regardles of how high or low house prices go, house prices always, always adjust until theat magic ratio is attained (5 in San Diego). It is happening again as we speak. The same thing always happens with the SP500 P/E ratio also.

These historical ratios do not reflect any concerns you mentioned, and you are right, they are general. However, they perpetuate for decades despite all the issues you mentioned. Thet are not carved in stone, they are just observations.

Very interesting observations.

Once when Benjamin Graham testified before congress, he was asked why undervalued stock prices always, always rise to their "fair" value. Graham said that that is one of the great mysteries of this business.

[Chris]

Why spend anything on the military? Absurd. The military spending needs to be drastically reduced and the savings used for other things. The absurdity of a nation in financial crisis choosing guns over butter is obvious, or it ought to be. Iraq and Afghanistan soak up money and do NOTHING for us at all but make us more despised and hated than ever. The age of US empire is over. As Roubini points out, a nation that loses its financial clout in the world can't long keep its empire. Barney Frank says the Pentagon should take a 25% haircut. I would say a 50% one is the minimum necessary.

[Patricia Shannon]

Lafayette says...

-- and I doubt seriously that higher housing costs are due to regulatory constraints. Many of those constraints are in place for ecological purposes -- for instance to assure that effluents do not pollute the water table.

That's because you don't live around here.

I read that in Europe, there is not the intolerance of mixing different size/price houses as there is in the U.S., perhaps because greater population density does not allow it, and your statement is evidence for it. This is what is called serendipity, because I was planning on asking non-U.S. readers of this blog about whether this was the same issue in their country as in the U.S.

An additional factor in the U.S. is that local governments prefer more expensive housing, because it allows for higher property taxes.

[anne]

Where gross domestic product declined last quarter, the reason was consumer spending which very seldom declines but which has become more and more difficult to maintain because of relatively poor gains in wages and benefits to ordinary workers through the expansion and correspondingly poor employment gains that became an employment recession in January. Add to that problems with personal wealth as home prices declined, and falling consumption is finally no surprise.

However, the GDP decline would have been considerably worse were it not for government spending, military spending precisely. Military spending grew by 18.1% last quarter, and military spending has largely been what helped us grow reasonably if not well through the expansion from 2001. We are increasingly dependent on military spending and George Bush is insuring that military spending will continue significant growth no matter the coming President.

[paine]

"The standard view is that the historical norm represents house prices that a majority of households can afford"
norm
hmmmmm

its claimed
at least in a discussion
flatulence is not as good as a bark
so....

of course there's
a set of causal patterns
behind the loops
lot values fly around household income

the persistence of epicentric ratios
over time
--given the noisey version of " the same"
common to hoi discourse---
a "mystery" ?

nope...
thwarted contrivance yes
but hardly mystery
that old snake oil salesman ben graham not withstanding

[paine]

George Bush is insuring that military spending will continue significant growth no matter the coming President

how anne ????

if he had that as a goal
why not throw us into war with iran ???

seems patently obvious to me
obama could yank us out of the whole middle east
and receive the applause not only of the world
but even the kulack people of amerika
for doing it

[anne]

There is already Democratic-Republican agreement on the need to significantly expand the size of American forces in general, troop levels in Afghanistan are now rising to 40,000 with an additional 20,000 just requested and Afghanistan an agreed focus by both parties. A drawing down of forces in Iraq is slated to take 3 years, with determination, a period in which since facility must be maintained in Iraq there will be about as much spending as now, if the British withdrawal experience is helpful in projecting cost.

Then there is the need for strengthening military facility that has been drawn upon in Iraq for other eventualities, the request from the Defense Department for modernizing our nuclear arsenal, maintaining an intelligence capacity that we just learned has doubled in budget in a decade, and on and on.

[anne]

I have not mentioned what will be significantly growing personnel costs for existing soldiers and veterans as previous experience with conflict shows. There is no reason to believe from repeated Democratic leadership pronouncements, that military spending will be any less emphasized. Even if such pronouncements have been for the purpose of campaigning effectively, the commitments easily bind or trap political leaders.

The sharing of aggressive stances towards Russia and China by political leaders and from the Defense Department is not a sign in the least of lessening emphasis on military spending. The Secretary of defense only days ago, emphasized the need for modernizing our nuclear arsenal expressly in terms of possible challenges from China and Russia (this at the Carnegie Institute for Peace).

[anne]

Need I mention setting of missile batteries in countries that can be convinced about the fun of having missiles around Russia for the sake of protecting against missile attacks from, well, Iran? I am not making this up.

[JO]

What Keynesian nonsense. Spend borrowed money on bullshit. We have seen this garbage the world over and it failed miserably. Japan has been trying to spend its way out of its problems for years with no success. Politicians love this crap because they can spend on all kinds of pet projects and the money is not theirs. The tried and true formula for dealing with hard times is never mentioned. And lets forget the fact that recessions are needed. they always have been and always will exists. No one can stop one. But the best way to deal with it is to cut lower / middle class income tax rates significantly, cut small business and corporate income tax heavily, and spend only what is needed on infrastructure. A country will run a deficit but this formula is the only one that best serves the masses and helps generate the most tax revenue. This type of solution has been done many times throughout the world and has worked well. Of course, it is not being considered because how many politicians love cutting taxes ??? It is much easier for them to tell the public they need to spend ! How in the world does the world continue to use the same solutions which have proven fallacious time and again? Time to end the Monetarist and Keynesian garbage and follow more of the principles from the neo-Classic school of thought.
JO

[Larry]

I don't see that many folks saying that prices need additional props. What I'd like to see is some of the existing irrational props removed. Why is interest on million dollar mortgages deductible? (Yes, this is me talking.) Why do we have special capital gains treatments (beyond the special treatment that other capital gains gets?) We need that capital elsewhere, such as switching out our carbon energy system for nuclear, solar, and bio.

@Gegner - ""While the central banks have the ability to 'negate' this excess funding, it is far more likely that it will be 'absorbed' through higher prices."

We're still in deflation-land. Central banks can turn on a dime. When inflation ends, they can suck the liquidity back out...

"Worse, this nation no longer possesses the physical capability to put millions of people back to work."

We don't need nearly as much physical capital as we used to. If labor markets are flexible, employment will expand.

@Laff - "We've undergone a pandemic of greed."

Fear or greed. Those are the only two choices. Maintaining the balance can be tricky.

@Richard H. Serlin - "Lowering of housing prices, over the long run, does immensely more good than bad.".

Yup.

@Oupoot - "it will take time for the over supply of housing to be absorbed by demand. But given the current conditions, it will take longer than normal for demand to catch up, with supply likely to be severely depressed for a long time. My guess it will take 5 - 10 years for the housing market to "stablelise", i.e. demand and supply to get back into sinc, but it will not be at pre-bubble levels, whatever or whenever that is/was."

There's no reason for it to take so long. Get prices down, and the supply will disappear quickly. That's already starting to happen in a few markets.

@reason - "I would like to see a recognition that the root cause is the unsustainable US trade deficit and the lack of growth in median incomes."

Those aren't root causes. The root causes of those symptoms are the global growth in available capital and stagnation of the US skills base. Only one of those needs fixing by us. The other requires the world's emerging middle class to save less and "go shopping". They don't need credit cards, just to spend more of their real income.

@Richard H. Serlin - "reverse bubble"

That's like saying that unemployment educates the unemployed about thrift. The cost is too great.

@Beezer - "it's not what government borrows, it's what government spends," that represents our future danger."

You got it. I don't expect any spending cuts other than a few on defense. Bigger cuts are unlikely until global lenders refuse to lend in $. That will take awhile. Dems are talking about unprecedented spending increases next year.

@anne - "the implicit assumption by wild conservatives that it is never possible to build bridges to somewhere, somewhere important."

No, it's that our political process is highly corrupt, so that bridges get built all over the place, depending on whose palm is getting greased.

"Rates of Unemployment"

Roosevelt was trying to cure pneumonia before we knew about penicillin. We had had many panics and crashes before, but none like that one. Some of his policies were good, others were bad. None cured the disease. War did.

"We are only beginning to learn of coming requests or demands for increased military spending that will be exceedingly difficult to limit."

The place to trim is in the superprojects (new subs, new fighters) not in infantry, readiness, or UAVs. There's lots of savings to be had. McCain is ready to cut sensibly...

@bakho - "How hard would it be to appropriate money that would go to the states on a formula basis that would have to be spent on infrastructure or renovation projects that are initiated in the next 3-6 months? Just because past programs have long lags does not mean that all programs must have the same lags."

Of course they don't, but is there any reason to believe that "this time it's different"? Some programs are ready to go, but states don't tend to get lots of projects all teed up and ready to pour unless they think they might actually be able to implement them (i.e., to get federal taxpayers to pay for them.) They have enough to do without getting ahead of themselves.

If you tell them "use it or lose it", there will be huge pressure to blow the money out the door regardless of whether the project makes sense or is "ready". Perverse incentives produce perverse results.

@Increase Productivity - "Don't waste the spending, or future borrowing to keep Social Security/Medicare going over the next 50 years may become a real challenge."

Now there's an understatement. There's no way to keep those commitments as such, even if we do spend smart, unless economic growth explodes and/or health care costs crash. Otherwise we have to at least double tax rates across the board.

@robertdfeinman - "The patient is suffering from a cancer (militarism) which just keeps growing and devouring ever bigger portions of the discretionary federal budget."

The military budget is a fraction of what it was during the Cold War. A little realism, please...

@hari - "When I saw Clinton along side with BO last night - it was real magic"

Using words like "magic" freaks me out. They're politicians, not saints. Clinton should have been the tipoff!

@Bruce Wilder - "Naturally, the narrative analysis focuses on the undeserving home "owner".

If we want to rescue 3M, how do we pick the lucky winners? Can I sign up? I just hope they filter out the pure speculators. They're all "behind".

"At the end of the day, there are at least 1.7 million homes no one wants. If incomes decline by a bit, the number of "surplus" residences might be more like 3 to 4 million."

In some hard-hit areas, prices have come down enough that inventories are starting to decline. Price cuts do work. "They're having a sale!" In the Bay Area, home sales increased 45% YOY in September.

@macburger - "The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don't serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program....So, tell me again - why was this bailout required?"

The "logic" is clear. The first group wasn't voluntary. They made all the biggest banks subscribe to protect the weakies in the group. Some of them likely said, "OK, we'll play, but leave our dividend alone." It now looks like the plan is unconstitutional. The Feds are supposed to offer equal terms to all in the same situation.

@Patricia Shannon - "An additional factor in the U.S. is that local governments prefer more expensive housing, because it allows for higher property taxes."

So do local owners. The old story of pulling the ladder up after you're over the wall never ends. If "affordable" housing gets built near "regular" housing, "regular" homeowners worry about the effect on the value of their homes. I don't know that they're incorrect, except "politically". Rather than affordable housing, we need capable buyers/renters. Section 8 actually makes sense as a housing program...

[Bruce Wilder]

cm: "I'm quite confident there is only a small minority among those that nobody would want at any price."

Are you?

The idea that markets clear at the equilibrium price is one of those ideas that bedevil economists. Many, many markets do not clear. Fact. If your economics does not include that aspect of reality, you need to go have a re-think.

My point -- not clearly expressed, I guess -- was an opinion about Feldstein's confidence that some intervention could prevent the housing market from overshooting on the downside. And, that intervention could take the form of a guarantee given to banks run by thieves and opportunists.

I'm really not responsible for the confidence right-wing fools like Feldstein have in the magic of the market. Not my gig. Not my illusion. But, I have to wonder what they are thinking, when, having had such a conviction, and foreseeing that housing prices will fall below trend, they act as if everyone just knows that this represents some market dysfunction, which they can prevent, with a simple, clever tweaking of contract terms.

My point about the overhang of "surplus" houses is not that there are a specific number of houses, which will be "worthless". (Although there will be some houses, which are literally worthless, and will be abandoned. And, in some areas (Flint, Akron), the numbers will be substantial.

My point is that there will be a specific number of houses, which will be unoccupied. That is, that market will not clear -- at least, it will not clear, in response from people, who actually want to live in the houses. Price will not settle neatly onto trend like trend is a price floor, just because you wish it so.

You can offer guarantees to banks, and the highly predictable result is that the banks will play musical chairs to make sure that those 3 million guaranteed mortgages are mortgages on houses, which will be foreclosed. Might as well just pay the money directly to the banks, now.

[anne]

"But the best way to deal with it is to cut lower / middle class income tax rates significantly, cut small business and corporate income tax heavily, and spend only what is needed on infrastructure."

Interestingly enough, cutting taxes significantly and heavily (which is more?) is just the strategy that has failed us to profoundly these lovely conservative prone years. Me, I say cut some more though and find how doing the same finally helps.

[anne]

Me, I like cutting thing off too, like taxes only not really....

http://etext.library.adelaide.edu.au/c/carroll/lewis/alice/chapter8.html

1865

Alice's Adventures in Wonderland
By Lewis Carroll

The Queen's Croquet-Ground

Alice began to feel very uneasy: to be sure, she had not as yet had any dispute with the Queen, but she knew that it might happen any minute, 'and then,' thought she, 'what would become of me? They're dreadfully fond of beheading people here; the great wonder is, that there's any one left alive!'

She was looking about for some way of escape, and wondering whether she could get away without being seen, when she noticed a curious appearance in the air: it puzzled her very much at first, but, after watching it a minute or two, she made it out to be a grin, and she said to herself 'It's the Cheshire Cat: now I shall have somebody to talk to.'

'How are you getting on?' said the Cat, as soon as there was mouth enough for it to speak with.

Alice waited till the eyes appeared, and then nodded. 'It's no use speaking to it,' she thought, 'till its ears have come, or at least one of them.' In another minute the whole head appeared, and then Alice put down her flamingo, and began an account of the game, feeling very glad she had someone to listen to her. The Cat seemed to think that there was enough of it now in sight, and no more of it appeared.

'I don't think they play at all fairly,' Alice began, in rather a complaining tone, 'and they all quarrel so dreadfully one can't hear oneself speak—and they don't seem to have any rules in particular; at least, if there are, nobody attends to them—and you've no idea how confusing it is all the things being alive; for instance, there's the arch I've got to go through next walking about at the other end of the ground—and I should have croqueted the Queen's hedgehog just now, only it ran away when it saw mine coming!'

'How do you like the Queen?' said the Cat in a low voice.

'Not at all,' said Alice: 'she's so extremely—' Just then she noticed that the Queen was close behind her, listening: so she went on, '—likely to win, that it's hardly worth while finishing the game.'

The Queen smiled and passed on.

'Who are you talking to?' said the King, going up to Alice, and looking at the Cat's head with great curiosity.

'It's a friend of mine—a Cheshire Cat,' said Alice: 'allow me to introduce it.'

'I don't like the look of it at all,' said the King: 'however, it may kiss my hand if it likes.'

'I'd rather not,' the Cat remarked.

'Don't be impertinent,' said the King, 'and don't look at me like that!' He got behind Alice as he spoke.

'A cat may look at a king,' said Alice. 'I've read that in some book, but I don't remember where.'

'Well, it must be removed,' said the King very decidedly, and he called the Queen, who was passing at the moment, 'My dear! I wish you would have this cat removed!'

The Queen had only one way of settling all difficulties, great or small. 'Off with his head!' she said, without even looking round.

'I'll fetch the executioner myself,' said the King eagerly, and he hurried off....

[Patricia Shannon]

Larry, unless you were restating what I meant about the main reason for housing prices being kept artificially high, then I should have stated it more clearly.

And why shouldn't ordinary people be able to own their own homes. Human beings don't operate as mechanical calculators. Eg., research has found that homeowners are more involved in the long-term good of their community.

A community consisting of people whose only concern is how much money they can make, cannot thrive.

[Patricia Shannon]

Larry, unless you were restating what I meant about the main reason for housing prices being kept artificially high, then I should have stated it more clearly, because that is what I meant, before I gave an "additional factor".

And why shouldn't ordinary people be able to own their own homes. Human beings don't operate as mechanical calculators. Eg., research has found that homeowners are more involved in the long-term good of their community.

A community consisting of people whose only concern is how much money they can make, cannot thrive in the long run.

[Larry]

@Bruce - "The idea that markets clear at the equilibrium price is one of those ideas that bedevil economists. Many, many markets do not clear."

Most do. The housing market consistently has (99%+ of the time).

"But, I have to wonder what they are thinking, when, having had such a conviction, and foreseeing that housing prices will fall below trend, they act as if everyone just knows that this represents some market dysfunction, which they can prevent, with a simple, clever tweaking of contract terms."

I usually associate that kind of hubris with liberals. I don't know what the heck he's thinking.

"My point is that there will be a specific number of houses, which will be unoccupied."

If this specific number is small enough, I think it's fair to say that the market has cleared. The last leaf of lettuce often gets tossed out at the supermarket, but the lettuce market clears just fine.

@anne - "Interestingly enough, cutting taxes significantly and heavily (which is more?) is just the strategy that has failed us to profoundly these lovely conservative prone years."

Is that what failed? I think we need to look elsewhere for demons. My two favorite are the explosion in the global availability of capital (we can see it right now in the $'s high price) and the delusion that house prices can never decline. I'd top the list up by adding in the stagnation/decline of the US skills base.

[anne]

As for Japan, as Paul Krugman made clear and as I know, Japan was remarkably successful in protecting employment in using a New Deal style spending stimulus through the deflation, the problem being that Japan values ordinary employment far more than we do these many years after the New Deal.

Correcting: [Me, I like cutting things off too.... Lower taxes, she cried.]

[Larry]

In support of the skills base point, I offer this from the NYT.

[anne]

http://www.nytimes.com/2008/10/30/opinion/30thu2.html?ref=opinion&pagewanted=print

October 30, 2008

Numbers Game

Americans should be deeply alarmed by new data showing that the country is continuing to lose ground educationally to its competitors abroad.

The United States once had the world's top high-school graduation rate. It has now fallen to 13th place behind countries like South Korea, the Czech Republic and Slovenia. Worse still, a new study from the Education Trust, a nonpartisan foundation, finds that this is the only country in the industrial world where young people are less likely than their parents to graduate high school.

Most American parents never see these damning international comparisons, which are based on census figures and labor force statistics. Instead, parents who want to know how their schools are doing in terms of vital statistics like graduation rates must rely on phony calculations cooked up by state governments that are determined to hide the truth for as long as possible.

With these problems clearly in mind, Margaret Spellings, the secretary of education, has issued new regulations for how school graduation rates are calculated and reported to the public under the No Child Left Behind Act. States will now be required to keep track of students from when they enter high school until they receive regular diplomas, counting as non-graduates any students who choose to leave school before that time.

Until now, the states have been able to calculate graduation rates any way they chose. For many states, that meant writing off students who leave school early and reporting a clearly bogus graduation rate based only on the number of students who began the senior year. Other states have tried to dress up abysmal rates by counting as graduates dropouts who later received G.E.D.'s.

Under the new counting rules, the states will be required to set clear goals for improving graduation rates and to demonstrate "continuous and substantial improvement" toward those goals.

For the first time, the states will also be required to report graduation rates by race to ensure that black and Latino students, who have significantly higher dropout rates than whites, get the special attention they clearly need. And instead of concealing graduation statistics — as many states have done up to now — state governments will be required to report them both to the federal government and the general public....

[mrrunangun]

NYT:Under the new counting rules, the states will be required to set clear goals for improving graduation rates and to demonstrate “continuous and substantial improvement” toward those goals.

For the first time, the states will also be required to report graduation rates by race to ensure that black and Latino students, who have significantly higher dropout rates than whites, get the special attention they clearly need. And instead of concealing graduation statistics — as many states have done up to now — state governments will be required to report them both to the federal government and the general public.

From whom will the minority students require said special attention? Unless things have changed very much for the better since my school days, a school has little capacity to retain adolescents who perceive no advantage in allowing themselves to be retained. The school seems to me to be the least likely source of successful persuasion of its students. Family support of educational goals is paramount, but community and political leadership, when ther is a lack of family support and encouragement, may be more successful. It remains to be seen in what direction our charismatic new president will lead the young folks, but emphasizing educational achievement in secondary education would be a big help. Kennedy made a great project of encouraging physical fitness among the young people and he had a lot of impact. Obama could perhaps do the same for mental skills.

[Bruce Wilder]

Larry: "Most do."

Do you have a list? A survey? A sample? A census?

Larry: "The housing market consistently has (99%+ of the time)."

99+% of the time? We can pick a local geographic area, at random, and track the number of houses on offer over, say 10 years, and at the close of business every day (or week or month), all of those houses have been sold?

99+% of the time?

On what planet, Larry?

[Bruce Wilder]

Larry: "The last leaf of lettuce often gets tossed out at the supermarket, but the lettuce market clears just fine."

This is, obviously, one of my pet peeves, and it is nothing personal, Larry, but what you are saying is just foolishness.

Some markets for lettuce may clear, and others don't. There are many markets for lettuce, and they are not all structured in the same; they do not all function in the same way.

If we are talking about the local retail "market" for lettuce, of which the supermarket where you shop is the embodiment, then, no, that market for lettuce, probably, does not clear. If your supermarket is typical, the price of lettuce is administered. The supermarket sets a price, and takes administrative actions to, more or less, maintain supply at that price; wastage is planned. The price doesn't vary to clear the market. The supermarket may vary advertising, wholesale buying, shipments, etc., to maintain the price -- or to vary the price and supply systematically according to some strategic plan: iceberg is out, arugula is in (Obama eats it) or some such.

Here's an excellent article about potatoes:
http://www.klamathbasin.info/NYT03-17-01.htm

[ken melvin]

Damn! All those factories moved to China for her skill bank. Who'd a thunk.

[Larry]

@Bruce Wilder - "Do you have a list? A survey? A sample? A census?"

Any market that doesn't clear produces queuing or enormous inventory. Is there anyplace where you see that? The example of queuing is the Soviet Union. I suppose that an example of inventory would be the periods in our history when we poured milk down the drain. Those markets didn't clear.

"We can pick a local geographic area, at random, and track the number of houses on offer over, say 10 years, and at the close of business every day (or week or month), all of those houses have been sold?"

Wrong measure. If the inventory remains stable, the market is clearing. If it declines, prices rise. If it rises, prices decline. Do I really need to go over this?

"If your supermarket is typical, the price of lettuce is administered. The supermarket sets a price, and takes administrative actions to, more or less, maintain supply at that price; wastage is planned."

The supermarket adjusts that price over and over to ensure that their local market clears. Of course, pricing isn't the only thing they vary. The point is that the net of all those actions clears the market.

@ken melvin - "Damn! All those factories moved to China for her skill bank. Who'd a thunk."

Their skills rose to the point where they could do lots of jobs that we were doing for a lot less. That left us two choices. One was to lower our wages to compete with China. The other was to upgrade our skills so that we competed with Europe and Japan for high-skill jobs. We chose the wrong option. The skills race is an every-day reality. Our highest skilled folks are doing just fine, but part of their success is their ability to upgrade those skills every day.

[ken melvin]

Ah so, so if we raise our skills we can take jobs away from Europe? Big gap in your logic.

[Beezer]

In regards to government spending, and a comment I made some hours ago, I should have been more specific.
Inflation is primarily the growth of unproductive forms of government spending on entitlements, defense and other spending that fail to stimulate the supply of goods and services. The burden of government is not measured by how much it taxes, but by how much it spends.
Reason said I should "get a new memory." Possibly. But there you have it Reason. I'm open to new memory.

[Beezer]

If you want to know why some children succeed and some don't you need only look at their family situation. Stable families produce successful children at a far greater rate than "spread out" families. Grandparents do the best they can, and they are sometimes successful in substituting for what we consider "normal" families, but it's an uphill battle.
The problem is cultural. What do you call a 17 year old Asian immigrant? Next year's Valedictorian.
It's totally about culture. If a culture does not prize family stability above all else, it's ability to produce successful offspring in today's world is diminished dramatically. Dramatically. No amount of funding can overcome this legacy deficiency.
There are exceptions, of course. Obama is one. For every Obama, there are literally hundreds of thousands of young men and women who suffer from cultural deprivation.
They have no legacy that values education. Respect is the ability to have a "woman." Knowledge is completely devalued.
"Bling" replaces "Brains." Pants pulled to butt level (in prison the sign that the person wearing the pants this way is ready to be someone's "woman") become a perverted symbol of individuality (bought off the rack.) Drugs are rampant and accepted.
And what industries profits most from such mal-information? Television, movies and the music industry. They profit from broadcasting the images of anti-intellectual culture. There's real money in them adolescent hills, after all. Bling vs Brains. Butt vs Knowledge. Sex vs Culture. Pinnochio made large and rich.
Stop blaming the education establishment. Start blaming the culture and the adults who pass this culture downward.

[Bruce Wilder]

Larry: "Any market that doesn't clear produces queuing or enormous inventory."

And, you think this, because . . . ? Because you are not aware of large, bureaucratic enterprise -- Alfred Chandler, railroads, General Electric, Standard Oil, General Motors, Sony, Microsoft, Wal-Mart???

Larry: "Is there anyplace where you see that?"

Queues are pretty common. I was just in one at the supermarket checkout. And, "enormous inventories" are pretty common, too. In fact, the same supermarket has some pretty sizeable inventories, including a remarkably large inventory of parking spaces, for which it doesn't charge.

All of the prices at the supermarket were clearly posted; no bidding was going on, and, with a few exceptions clearly noted, the supermarket seemed ready to sell most any quantity of any product at the posted price, but was unwilling to sell any thing at even a slightly lower price. Although the supermarket is willing to accept coupons, and offers a modest discount, if you use their shopper card.

Here's a simple example of a market that doesn't clear, and has "enormous inventories": movie theatres. The "enormous inventories" are theatre seats, most of which are empty and unused, for performance after performance. The price doesn't fall, just because the theatre is mostly empty. It is rare to even vary the ticket price among movie titles, though it does happen.

I'll give you a more salient example: I had to wait for ten days, a while back, for an Apple iPhone 3G, which I ordered from AT&T. The price hasn't changed, since then, but the phones are now available at Best Buy.

We don't notice the "enormous inventories" and queues, most of the time, because a large administrative organization is in place to manage the process of production and distribution. But, that administration is not the same as Walrasian tatonnement, and it accomplishes its tasks, in fact, by suspending tatonnement, and administering the price, along with production rates, advertising, promotion, design, timing, packaging, availability, inventory, etc.

Here's another thing to notice about the economic world around you: most large businesses are more than willing to sell as many as possible at the administered price. It is very common for them to spend considerable resources promoting their products and services, in the hope of increasing sales -- at the administered price. The willingness to make sunk cost investments in advertising to increase sales, combined with a fixed, administered price, implies that marginal costs is less than price and declining.

That marginal cost is less than price implies some kind of monopoly power. That's kind of boring.

But, the second implication -- that marginal cost is declining -- is relevant to the question of whether a market equilibrium exists. 'Cause a market equilibrium (of the market-clearing kind) really cannot exist in the case of declining marginal cost.

All of those instances, where large business organizations enjoy increasing returns -- those are all cases of declining marginal cost, and, also, cases where a market-clearing equilibrium price is simply not possible.

None of this has much to do with the housing market, where a large excess inventory may well fail to clear for a prolonged period, depressing prices.

[Bruce Wilder]

Larry: "The supermarket adjusts that price over and over to ensure that their local market clears. Of course, pricing isn't the only thing they vary. The point is that the net of all those actions clears the market."

Nope.