Welcome to California, Elliot Hirshman

San Diego State University, a place I admire a lot, just hired Elliot Hirshman as its new president, at a controversial salary. I am not exactly sure what I believe about how much public university presidents and provosts should be paid, but I do know that Elliot was an excellent hire for SDSU, and therefore for California.

Elliot was Chief Research Officer at George Washington when I was there, and I served on a university committee that he chaired.  He was and am sure still is a good leader, good listener, and problem solver.  Research service for faculty at GW improved considerably during his tenure.  

If I am reading the deal correctly...

....this is not a compromise, this is a capitulation.  I am starting to think that Cornell West's characterization of Obama was correct.

Jenny Schuetz, Elizabeth Currid-Halkett and I have a new paper that has nothing to do with the debt crisis

It is here.

Abstract:     

The art market is famous – or notorious – for auctions at Sotheby’s and Christie’s at which works by well-known artists are sold for stratospheric prices. Researchers have argued that such prices are volatile and unpredictable based on economic fundamentals, implying that at least some segment of the art market behaves irrationally. In this paper, we examine whether the broader art market, composed mostly of small galleries, is more consistent with standard economic models. In particular, we ask whether the location patterns of art galleries exhibit behavior consistent with agglomeration economies, as would be predicted for retail firms selling highly differentiated and expensive products. Using a newly developed database, we find strong evidence of agglomeration economies among Manhattan art galleries from 1970-2003. Galleries locate in highly concentrated spatial clusters, and these clusters are more likely to occur in neighborhoods with affluent households and older, more expensive housing, consistent with locating near potential consumers. We find no evidence that galleries locate in cheap, “bohemian” neighborhoods. The highest quality tier of the art market, which has been most widely studied, contains a relatively small share of gallery establishments, although these “star” galleries have a longer average lifespan than non-star galleries. Locating near other galleries also increases the longevity of firms and establishments.

Are we a 15 percent society or an 18 percent society?

Over the long term, federal revenues as a share of GDP have averaged around 18 19 percent over the past 20 years.  Currently, federal revenues as a share of GDP are about 15 percent.  Some of the difference arises from lower tax collections because of the recession, but most is the result of the Bush Tax cuts.  Obama cut taxes even more (yes, he has cut taxes--payroll tax reduction, housing tax credit, etc.).

The question is, do we want to be a 15 percent society?  I guess the Teapartiers would say yes.  But this would not just mean that we need to do things like slowly extend the retirement age and bend the cost curve on health care--it would mean that to reach long run sustainability, we would have to cut current benefit levels.

Even Paul Ryan's budget plan presumes revenues would increase to 18 19 percent of GDP--it just doesn't specify how to get there.  Personally, I think we can afford to spend even more on the sick and the elderly (and children), but we need to be willing to pay for it.  For the time being, I would be happy to return to the long-term revenue average.

If we follow the 15 percent path, we will be kicking grandmothers out of their wheelchairs.  We will be allowing children to be malnourished.  This is not demagoguery.  This is the cost of not being willing to tax ourselves at the level we have for many years taxed ourselves.

This is probably a crazy, stupid idea for getting around the debt ceiling, but...

...here goes anyway. 

Consider a 30-year Treasury Bond with a coupon of 4 percent and a par value of $100.  Treasuries pay every six months, so this produces 60 cash flows of $2 and then $100 at the end of the 30 years.

To make things easy, assume for a minute that that market is discounting 30-year bonds at 4 percent per year (or 2 percent per six months).  Suppose the US government offers investors a swap of 4 percent coupon bonds for 8 percent coupon bonds.  If we don't worry about duration issues for a moment, and use Excel notation (I don't know how to get Greek symbols in blogger), investors would be indifferent between:

PV(.02,60,2)+100/(1.02^60)

and

PV(.02,60,4X)+100X/(1.02^60).

X is the face value of the new bond, and comes out to about $58.99.  So the face value of the debt is reduced by 41 percent, while the value to investors remains constant.  Nothing of substance has changed (and actually duration risk is a little lower), but the balance sheet looks better.

I am sure I am missing some institutional thing here, or maybe my simple finance is off somehow, but still...

Don't lump everyone together, Professor Summers

In his response to Mark Thoma's "Great Divide," post, Larry Summers writes:

Second, as Keynes’ comments on the advantages of being conventionally wrong rather than unconventionally right illustrate, it is a serious mistake to overstate the insights possessed by practitioners in any field.  Anyone in mutual funds will tell you that active managers regularly outperform the market.  Only economic scientists realized they do not.  Contrary to the the implications of Thoma’s column, the best calls on the real estate bubble came from academics like Bob Shiller and Nouriel Roubini, not from any economists involved with the home building or realty industries.

While Summers' point about Bob Shiller and Nouriel Roubini is correct (and what was particularly impressive is that they explained the mechanisms that would create the destruction), he does not acknowledge that non-academic economics, such as Dean Baker and Chris Thornberg, also called the bubble.  On the other hand, lots of academic economists did not see the crisis coming (I certainly did not see the magnitude of it).


It is, moreover, not fair to lump Realtors and homebuilders together.  The Realtors' Chief Economist at the time (whose name I shall not mention) was ridiculous.  But while Dave Seiders, Chief Economist at the time with the National Association of Homebuilders, did not get it right, he did not do badly either.  I remember being impressed with NAHB at the time, because they were not being cheerleaders--they seemed to me to be playing things pretty straight down the middle.

Homer Simpson, Spock, Reaction Functions, and the Debt Ceiling

Imagine a game between Spock and Homer Simpson.  Spock's utility is maximized by saving the galaxy from destruction.  Homer Simpson's utility function is maximized by beer.  Spock gets some disutility from the amount of beer Homer Simpson drinks, because drinking makes Homer obnoxious, but it is less than the disutility he would get from the galaxy being destroyed.  Homer Simpson gets no disutility from the galaxy being destroyed, because he doesn't think it is possible.

Homer thus ties himself to the mast--he must get his beer no matter what--if he doesn't, he will allow the galaxy to be destroyed.  Homer therefore has a stronger negotiating position than Spock.  Similarly, people who think the earth is 4000 years old, that dinosaurs lived with humans, and don't believe there would be consequences to government default are in a stronger negotiating position.

The Mortgage Professor is Worried

Jack Guttentag writes:

...“If a default had the horrendous consequences you describe, and these induce Congress and the Administration to agree finally on an increase in the debt ceiling, how long would it take financial markets to return to normal?”

 Markets would never return to a state where US Government obligations are viewed as riskless. We will pay for this loss of grace forever.

 Investors in fixed-income securities are worse-case oriented, and make a major distinction between the impossible and the unlikely. The current rates that the Treasury must pay investors are based on the assumption that default is impossible. Once a default occurs, it will NEVER again be viewed as impossible. The additional cost of carrying debt on which default is possible will be paid forever....

Read the whole post.

Bad belt-tightening metaphors

A commonplace among politicians that drives me crazy is that "government must live within its means, just like families."

The problem is that families don't, at least within the meaning implied by the above statement.  Personal income in the United States is about $12.9 trillion.  Mortgage debt outstanding is about $10.5 trillion.  Consumer credit outstanding is about $2.4 trillion.  So the ratio of consumer debt relative to consumer income is similar to US government debt to GDP.

I am not saying we needn't worry about long term fiscal balance--we do.  As I have said before, we must, among other things, return tax revenues to at least their long-term mean as a share of GDP, and bend the cost-curve for health care--something that Obamacare actually tries to do. But bad metaphors that basically dishonestly flatter people are not helpful.

Caltrans needs to fix this sign

Visitors to LA get misled by this old freeway sign on the Pasadena Freeway headed south:

The problem is that it is not an interchange with the 101 and the 5--it is just an interchange with the 101, which heads south a couple of miles to the 5.  People look for the 101 South and miss it, because it is nowhere to be found on signs.



  

Tastes in Tax Policy

I confess that I like the broad outlines of the Gang of Six plan.  I don't have a problem with people like me having to wait longer to retire, so long as people who do physical labor get held harmless. 

It occurs to me that I care about substantial progressivity at the bottom of the income distribution (and I am a big fan of the Earned Income Tax Credit).  To calculate progressivity, one needs to take into account ALL taxes, including FICA and state and local taxes.  I also need to think about Mark Thoma's point about the progeressivity of both taxes and benefits--maybe Europe is onto something in using regressive or proportional consumption taxes to finance a strongly progressive safety net.  I suppose the question is whether getting progressiveness out of taxes or spending produces less dead-weight loss.

But once income reaches a certain threshold ($100K per year?), proportional taxes are just fine with me.  A reasonablly flat rate structure with an earned income tax credit, few deductions, and a large exemption would do the trick.