Home Values

Sob stories about the decline in home values fill the media until I'm running out of Kleenex. Not. What a crock. I can remember a time when people who sold their house and got back what they'd put into it felt like winners for having "lived for free" during those years. Nobody expected to walk away with a fat pile of profit, and unless some commercial developer wanted the property for a shopping center site, they very rarely did. Somewhere along the way, houses became commodities on a national real estate exchange, and everybody knows the risks of commodity trading, especially when you're trading in a suddenly hot, get-in-get-out commodity. If they didn't, they do now.

Joel Stein gets it right in his article I Bought an Expensive House. My Bad, Not Yours. But first some data:

Below is a table from A Look at Case-Shiller Numbers, by Metro Area showing the value of a typical home in each of 20 metro areas as of a couple of months ago (Dec 2008), compared with that value back in January of 2000. The January 2000 value is indexed at 100, so if the Dec 2008 figure is 153 (Boston), it means that the typical home appreciated by 53% in those eight years. That's an average appreciation of a little less than 6% per year, compounded, and this is after and including all the catastrophic declines in home values we've been hearing about. Home owners in LA, NYC, and Wash DC have done substantially better than that, while only homes in Detroit have actually lost value since 2000.

What this means is that with few exceptions the people who have seen their home values drop are people who bought at or near the height of the housing bubble. So what have we discovered? We've discovered that highly leveraged buying near the top of a valuation bubble is a very risky investment strategy. Whoa! Hold the presses!

(I've got some stocks and mutual funds that are under water, so I think the rest of you taxpayers should bail me out. We're all in this together, right? Of course if we all bail each other out, it's like taking in each other's laundry. But fortunately we can solve that problem by borrowing the bail-out money from the Chinese and having our kids and grandkids pay it back, with interest. That might sound like intergenerational theft, but, see, they can just roll it over onto their own kids and grandkids! Whoopee!)

Byron

Metro Area     December 2008
    
Atlanta        113.87
Boston         153.05
Charlotte      122.41
Chicago        137.16
Cleveland      105.21
Dallas         115.63
Denver         125.74
Detroit         80.93
Las Vegas      131.40
Los Angeles    171.46
Miami          165.01
Minneapolis    127.00
New York       183.50
Phoenix        123.93
Portland       158.50
San Diego      152.16
San Francisco  130.12
Seattle        160.19
Washington     176.34

Source: Standard & Poor’s and FiservData

Bail-out protests

The so-called New Tea Party protests seem to be spreading, at least for the moment, with demonstrations occurring or planned in cities around the country. Reporter Rick Santelli has become famous overnight for his outburst on CNBC, asking who wants to pay his neighbor's mortgage when the neighbor lives in a bigger house than you do? Renters want to know why, as their tax money goes to help in-trouble homeowners keep homes they couldn't afford, those who rent get no help at all. People who live in some cold, grimy factory town in the upper Midwest wonder why they should be asked to bail out the irresponsible profligate spenders enjoying the sunshine in California, Florida, or Arizona. Others ask by what right those who were irresponsible in this generation should be allowed to saddle everyone's children and grandchildren with a massive overburden of debt.

Some are thinking of specific protest actions of other, quieter sorts, such as starving the beast by investing only in municipal bonds, so as to minimize or eliminate taxable income. Or this sort of thing, which appeared in the Comments of a website:

"You want to make a protest that is more than symbolic? Want to send a message that goes straight to the heart of what pisses us all off about this bailout?

"Start making all of your mortgage payments 15 days late. Federal law imposes a grace period of 15 days, and forbids the imposition of late fees or credit reporting on late payments that are made within the grace period. There is no penalty, but if 1 million people did this with an average $1000 mortgage payment, that is like pulling a billion dollars out of the system.

"To really twist the knife, withdraw permanently $1000 from your checking, savings, or brokerage account. Keep it at home in cash, or buy an ounce of gold with it and hold on to that. Now those "late" mortgage payments are not offset by the cash sitting in an account, they are pulled out of the system altogether.

"That will not be ignored. Its your money they are screwing with, let them know how it feels when enough people decide to take their ball and go home."

Cutting off your nose to spite your face? Probably. But Obama's refrain that "we're all in this together" is not going to cut it with people who played by the rules and did nothing to contribute to this mess, and who now see others who gamed the system being rewarded at their expense. "We're all in it together" appeals to the principle of equality, but the idea that equality is synonymous with justice is badly mistaken. Equality that is not earned is unjust. What is at issue here, contrary to Obama's pieties, is not equality; what's at issue is equity.

The principle of equity -- that a person's outcomes should be proportional to his inputs -- is very deeply and widely held, including by people who have no good idea how to state it with any precision, but who feel it nevertheless. It's why socialist experiments fail, as the energetic and productive find themselves earning no more than the slackers, and so to achieve equity slacken their own efforts. Inequity is felt at a visceral level; the person who benefits from it feels it as guilt, while the exploited person feels it as anger. The principle of equity lies behind every notion of justice and fairness from an-eye-for-an-eye forward, and it is the ethical ground that informs and conditions public debates across the spectrum, from executive compensation to welfare fraud to capital punishment.

The sense of justice is about as elemental and primal as it gets, and so are the emotions that injustice evokes. What will be the predominant public reaction to a GM-UAW bailout, satisfaction and relief, or anger and outrage? My money goes on the latter. The market delivers a kind of rough justice, but Obama and his team are out to make sure that doesn't happen. They are playing with fire, I think, and my guess is that all hopes about overcoming public resistance with soaring rhetorical appeals are already DOA. People know injustice when they see it; they feel it in their bones, and they will not be talked out of it.

Byron

Let Wall Street Fail?

Let Wall Street Fail describes a plan that will not be tried, and maybe shouldn't be.

But how about an intermediate, pseudo-market approach? Have the government act on the market principle that money will be directed to those that do the best job. Use TARP's remaining $350 billion to keep things afloat for the next couple of months, but with fair warning that at the end of that time, the half of outfits that have done the best job of reforming and resuscitating themselves will get additional taxpayer support. The other half will be turned loose, and good luck to them. Is there any doubt we'd see a marked increase in seriousness and urgency among these firms? There's nothing like a competition for survival to focus the mind.

In contrast, the current approach talks loosely about trillions (!) in additional bail out money on the way, and everybody can look forward to getting whatever they need. In fact, the bigger mess you got yourself into, the more public money you'll get. With no apparent effort to direct the money only to the most deserving, these firms are not forced to be competitors to excel each other in a race to survive -- they've become allies in a cooperative woe-is-us lobbying effort to extract the maximum from the public purse. They're a team, and with enough trillions, it's a game they all can win.

This is all completely predictable. Given the policy framework they're operating in, these firms would be irrational to act in any other way. It's the badly conceived policy of non-contingent government largesse that's the problem. Instead, let's make taxpayer support depend on being in the top half by a date certain, and then stand back and let them fight it out.

Won't happen. But if there is a sensible policy principle in the current approach, I can't find it.

Byron

Inmates running the asylum

At his news conference last night, Obama said he didn't want to describe the new bank bail-out plan, because that would steal Geithner's "Day in the Sun." Quite a Day in the Sun! His non-plan was met with laughter at a Congressional briefing, and with a 400-pt drop by the Dow. Geithner, recall, is the guy who couldn't figure out his own taxes, even with help from TurboTax. He doesn't look like a deer in the headlights, he looks like a deer that got run over trying to figure out what those lights were all about. Call it a mercy killing. Obama, Biden, Geithner, Pelosi, Reid: Is that a Murderer's Row, or what? See them soon in The Five Stooges, out soon on BluRay. It would have been Six, but Daschle did a crash and burn before he got the chance to design a comprehensive national health care program on the twelve bucks that will be left in the Treasury.

Does anyone else get the feeling that the hard-earned and long-accumulated wealth of the nation is being squandered by a pack of nit-wits? Here's an idea. Let's declare Washington a Clue-Free Zone, and send everybody home until this is over. You know, until the market gets people into living arrangements they can afford, gets mortgage writing back in the hands of local institutions that know what they're lending on and to whom, until tax cuts and low interest rates have their effect on investment and employment -- exotic stuff like that.

With these guys feverishly yanking the levers and pretending they know what they're doing, this can roll on until they've used up all the money and run out of countries to borrow from. Left to their own devices, this bunch is fully capable of producing another Depression, because they don't know that they don't know, yet are bound and determined to Do Something. What I'm going to do is Netflix Fred Astaire and Ginger Rogers in "Flying Down to Rio," and maybe convince myself that 1933 wasn't so bad, after all.

Byron

Via Instapundit: Geithner: From Indispensable to Indecipherable

Tax cuts vs. Gov't spending

Some are claiming that it is not true that tax cuts have a bigger economic effect than does government spending. They argue that various studies show that a dollar of government spending has a bigger stimulus effect than does a dollar of tax cuts.

Problem is, those studies only consider the income effects of a tax cut (the extra money it puts in people's pockets), but without taking into account the incentive effects of lower tax rates. It's those incentive effects of lower rates that create additional economic activity (business start-ups, etc.), which results in growing wealth and employment down the road.

This is also why tax cuts, which reduce rates, are so much better than tax rebates, which just distribute checks. Those rebate checks may cause a brief bump in consumer demand, but they do nothing to alter the incentives to business expansion. A rate cut provides new incentives to risk a business start-up or expansion; a one-time mail-out of rebate checks has no such effect. Short-term stimulus spending is, in effect, nothing more than a huge pile of rebate checks -- except even less effective because government spending is more wasteful than spending by individuals.

In the end, the crucial difference here is, of course, political: Government spending enhances the scope and power of government, and Democrats value that above all. Like they say, elections have consequences.

Byron

For a discussion of these issues, see interview with Robert Barro:

Excerpt:

Interviewer: Why does this set of evidence depart from what seems like the standard Keynesian theory that a dollar of spending would have a larger multiplier than a dollar of tax cutting?

Barro: I don't think it is really confusing at all, because when you cut taxes there are two different effects. One is that you cut tax rates, and therefore give people incentives to do things like work and produce more and pay more -- maybe, depending on what kind of taxes. And then you also maybe give people more income. This income effect is the one that's related to this Keynesian multiplier argument, where it's usually argued that government spending should have a bigger effect. So that's the income effect. But the tax-rate effect, inducing people to do things like work and produce more and invest more, is a whole separate effect, and that could easily be much bigger than the multiplier thing, than the income thing.

Interviewer: This might just be my confusion, but the inducement to work, is separate from the idea of boosting aggregate demand and consumption in the short run.

Barro: Oh it's exceptionally different. But the experiment is that the government is doing something by changing the tax system to lower its collections -- by, for example, a tax cut. The response of the economy to that is not going just to isolate this business of giving people money. It's also going to have these incentive effects, more than tax rebates, on economic activity. It's going to be a combination of those two things -- income effects and incentive effects. One piece looks like this sort of multiplier stuff, which is analogous to government spending -- probably because the government spending has a first-round effect where it comes in and directly affects the aggregate demand -- and then in the second round it sort of looks like a tax cut. That's why the government spending thing is bigger in textbooks: because it has this first round in addition to all these subsequent ones.

But all that is just income responses -- people having more or less income, or the government keeping the money and then that shows up as people's income. None of that is about responses in terms of incentives -- incentives changing in response to lower or higher tax rates.

Inside Wal-Mart

A truly great company, and a fabulous national resource. Who would you rather have in charge of getting a vaccine nationwide in a pandemic, the Wal-Mart distribution system or FEMA? Not even remotely close. Wal-Mart is also the most effective entry-level job training program we have, by far, since the military cut back on doing that job.

FLY ON THE WAL

Sadly, no surprise

Iraqi death researcher censured

This study of civilian deaths in the Iraq War has been known to be junk virtually since its publication, although the anti-war left constantly cites its ridiculous estimates as established truth. Now the primary investigator won't cooperate with an inquiry into how the research was done.

It's a deep embarrassment, or should be, to both The Lancet, where it was published, and to Johns Hopkins, where Burnham works. The method of extrapolation used was simply preposterous, and it produced preposterous results. As murderers always discover, death leaves a body, and it takes extraordinary effort to make a body disappear. When the extrapolations yielded death estimates that were half a million (!) more than the body count, it should have waved a profusion of red flags to the Lancet reviewers. Sadly, they were more interested in having the journal make a political point, thus rendering yet another formerly trustworthy source untrustworthy.

[ Aside: You can find a similar pattern of politically correct junk science in CDC studies of gun deaths in the US, and in Michael Bellesiles, (History Prof. at Emory), being awarded Columbia's Bancroft Prize for a study of gun ownership in early America, then having to return it and resign his position in disgrace when his research was exposed as fraudulent. Bellesiles downfall was due to the efforts of a lay expert, Clayton Cramer, not to professional historians policing their own. On the former, see http://www.reason.com/news/show/30225.html , for the latter http://en.wikipedia.org/wiki/Michael_A._Bellesiles ]

Science in the service of grinding some ideological axe is always an ugly sight. In a free society, science and news reporting are the two areas that must be kept free of bias; as we swim through social-political space, they are the only reliable anchors we have. It's no accident that they are the very first things every authoritarian regime, left or right, sets out to corrupt.

Byron