The graph above is making the rounds again, this time spurred by a post from Dave Altig of the Atlanta Fed:

Prior to the crisis, I was persistently advised that the better way to think about the “right” home price is to focus on price-rent ratios, because rents reflect the fundamental flow of implicit or explicit income generated by a housing asset. In retrospect that advice looks pretty good, so I am inclined to think in those terms today. A simple back-of-the envelope calculation for this ratio—essentially comparing the path of the S&P/Case-Shiller composite price index for 20 metropolitan regions to the time path of the rent of primary residences in the consumer price index—tells a somewhat different story than the New York Times chart used in the aforementioned Ritholtz blog post…

The Ritholtz post in question includes a version of the graph updated to include more recent data. Go on over to the Altig post linked above to see it.

When I look at that graph three things leap out at me. First, there’s the obvious housing bubble of the middle Aughts. The second thing is the substantial jump following World War II. I think that leap can be explained by several developments: technological advances in housing construction, e.g. pre-fab, increasing use of 30 year mortgages, VA loans, and demographics.

What explains the jump following the First World War? Prior to the creation of the New Deal FHA and the invention of 30 year mortgages by Amadeo Giannini of Bank of America, the normal term for a home mortgage was anything between five and ten years. After that period the borrower would need to renegotiate. When was the 20 year mortgage introduced?

The explanation I’ve heard for the jump was (unspecified) technological advancement in home construction. I think it may have been the automobile.

The point I’m getting to in all of this is what is the correct, normal level for home prices? Does a reversion to mean suggest a return to the post-World War II mean? Why is that normal?

There’s a truly interesting post over at naked capitalism on the manifest failures of economists in the lead-up and consequences of the (I believe ongoing) financial crisis. I’m looking forward to the second installment in which the author promises to propose some updates to the economics curriculum.

To the post I’d add one thing. Economics is a science of human behavior. Like anthropology or sociology it is divided into classroom and field work. Classroom economists have titles like “professor” or “lecturer”. Field economists have titles like “trader” or “financier”. Today’s foremost field economists are people like Warren Buffett, George Soros, and Bill Gross.

That dichotomy has been in place since the early days of economics, cf. David Ricardo.

Why do we turn to classroom economists when looking for field-level solutions? I don’t honestly know and I’d like to.

One disquieting possibility is that the classroom economists (in which category I’d place people like Larry Summers and Ben Bernanke) are at base timid souls, easily influenced to provide the answers that politicians, field workers of a different kind, demand.

After a night out with friends (bloggers Megan McArdle and Peter Suderman), blogger Matthew Yglesias was assaulted:

But then lo and behold right by Catania Bakery a couple of dudes ran up from behind, punched me in the head, then kicked me a couple of times before running off. Once, years ago, in Amsterdam a guy threatened me with a knife and took my money. These guys took nothing, and just inflicted a bit of pain.

I sympathize deeply with Matthew. Something similar happened to me when I was just a bit younger than Matthew is now (jumped by three guys after an evening out with friends) albeit with a different outcome. I think he might want to seek out some counseling: being the victim of a crime, particularly a violent crime can have consequences that don’t become apparent until much later.

However, I have very little sympathy with his observation:

To offer a policy observation, higher density helps reduce street crime in an urban environment in two ways. One is that in a higher density city, any given street is less likely to be empty of passersby at any given time. The other is that if a given patch of land has more citizens, that means it can also support a larger base of police officers. And for policing efficacy both the ratio of cops to citzens and of cops to land matters. Therefore, all else being equal a denser city will be a better policed city.

Since Durkheim wrote about crime as a social phenomenon more than a century ago it has been believed that higher density meant more crime not less. I don’t believe there’s a simple correlation; however, I think the evidence is overwhelming that some factors (population density, young population, transient population, unemployment and underemployment, etc.) are positively correlated with higher crime rates and that the larger the city the more likely these factors are to be the case. There are volumes of studies to that effect.

Are large cities “better policed”? I think the evidence of that is equivocal.

If you define “better policed” as more police officers per 1,000 residents cities of 250,000 population or more have, on average, 2.5 fulltime police officers per 1,000 residents while cities of 1,000 to 2,499 population have 2.6 fulltime police officers per 1,000 residents. That’s no great difference, it doesn’t really explain the lower crime rates in small towns, and it certainly doesn’t support the idea that lots more police officers means less crime.

Here’s a quote from Tony Bouza, formerly police chief of Minneapolis:

“Cops have nothing to do with the crime rate, and anyone who says so is an idiot,” he said. “They’re irrelevant to preventing crime — they just displace it to another area. And society can produce criminals at a much faster rate than the police can arrest everyone they can find.”

I also seem to recall a study (done in Kansas City? Omaha?) some years ago. In the study three precincts with similar demographics, density, building patterns, and crime rates were selected. In one precinct the number of policemen assigned was cut in half, in another it was left the same, and in the third it was doubled. Six months later no changes in the crime rates were observed. If I actually put my hands on the study I’ll cite it but I remember it vividly.

I don’t draw the conclusion from this that the number of police officers related to the number of residents is irrelevant; I conclude that there is no simple relationship between crime and population or population density.

Something that I think it’s important to remember: bureaucracies do not grow linearly. They grow greater than linearly and, consequently, a larger police force is significantly more expensive on a per capita basis than a smaller one.

I could also critique Matt’s assumptions about traffic and policing but I think I’ll stop there.

Therefore, while I sympathize with Matt very deeply I’m pretty skeptical about his prescription for reducing crime. I’d like to see some more evidence.

Update

I am reminded of Jane Jacobs’s hypothesis back in the 1960s of an inverse relationship between crime and population density and, indeed, there’s some evidence to support that:

Since most of the studies reviewed used data that were aggregated to a larger geographic area, it was suspected that the precision inherent in more disaggregated data would allow differences in urban and suburban areas to be teased out. Thus, the Jacobs (1961) hypothesis was adopted for the urban area and the converse hypothesis was put forward for the suburban area.

Instead, the results show that when layered onto more traditional predictive (sociodemographic) variables, population density at the census block group level is a
significant negative predictor of violent crime in both types of development, as well as in the county as a whole. Therefore, the Jacobs hypothesis, which was developed in distinctly dense urban areas of the Northeastern U.S., is supported in very diverse settings. Importantly, this environmental characteristic – population density – predicted more of the variance in violent crime than the majority of the other population characteristics in the model. The magnitude of this environmental characteristic represents an important theoretical contribution to the violent crime literature—namely that at extra-individual scales, environments are more powerful determinants of violent crime than the population characteristics that are traditionally examined.

However, Population Growth, Density and the Costs of Providing Public Services, by Helen F. Ladd in Urban Studies, Vol. 29, No. 2, 1992 notes that public safety spending per capita rises with population and that for most settings more population density equals more per capita costs to government

I see that this subject has caught James Joyner’s eye as well.

Institutions of higher learning have a number of possibly contradictory goals. Among them are

• Scholarship
• Education
• Training
• Certification
• Indoctrination
• Warehousing

Scholarship is research, publication, and other related activities. Education is inculcating in students facts, theories, practices, and habits of mind that will help them to lead richer (not necessarily in a pecuniary sense), fuller lives. Training is the teaching of specific skills, especially job-related skills. Certification is warranting the possession of certain skills.

Indoctrination takes any of a number of forms, from attracting foreign-born students and scholars to the United States and convincing them to stay to organizing for political activism. Once upon a time institutions of higher learning served as places where the children of the ruling elite went to make the contacts and relationships that would enable them to take their places at the heads of companies, government, and other institutions. For all I know that still goes on and I would consider it a form a of indoctrination, too.

What I call “warehousing” is providing a place for nominal students, those who already have degrees. and others to appear to be engaged in productive activity when they would otherwise be unemployed.

In the United States at all levels of government we spend several hundred billion dollars supporting institutions of higher learning. The state of Illinois alone spends $2.7 billion per year on its system of state universities.

Here are my questions:

• Which of the functions above are legitimate causes for government spending? All? None?
• Are the functions above better uses for the funds than, say, infrastructure improvement or better pre-natal care for poor mothers (just to give a couple of examples)?
• Are we receiving several hundred billion dollars of utility from several hundred billion dollars of expenditures? Is what we’re spending worth the cost?
• Are there more efficient or more effective ways to provide the same legitimate functions?
• Why aren’t the states and federal government in the online education business?

That sucking sound you hear is the federal budget being dragged down the healthcare maw. The Medicare Trustees report that under current projections the trust fund will be exhausted in 2024:

Medicare will run out of money five years earlier than previously estimated because of the slowing economy, the program’s trustees said in their annual report Friday.

The trust fund that pays for seniors’ hospital stays will run out of money by 2024 under current projections, the trustees warned. And Social Security will go broke in 2036 if nothing is done.

Republicans immediately jumped on the latest numbers to make the case for comprehensive reforms and spending cuts.

“Today’s report makes it clearer than ever that doing nothing is not an option,” Ways and Means Chairman Dave Camp (R-Mich.), Health Subcommittee Chairman Wally Herger (R-Calif.) and Social Security Subcommittee Chairman Sam Johnson (R-Texas) said in a joint statement. “The failure to act means current, as well as future beneficiaries, will face significant cuts even sooner than previously estimated. We call on the President and all of our colleagues in the House and Senate to act now and take the long overdue steps to strengthen these vital programs. It’s what Americans expect of us, it’s what taxpayers demand and it’s what our children deserve.”

“Current projections” means including the rosy predictions of the PPACA. To refresh your memory Medicare’s actuaries have already gone on record in proclaiming those unrealistic.

I think it was Winston Churchill who said that the Americans always do the right thing when every other alternative has been exhausted. I sure wish we’d do the right thing sooner than that because once the crisis has struck the solutions that will be arrived at are likely to be sub-optimal.

Update

Let me amplify this a little bit. What the trust fund running dry means is that one of two things will happen. Either reimbursements under Medicare will be limited to the revenues coming into the trust fund from payroll deductions or money will come from the general fund to cover the shortfall. I’m guessing it will be the latter but if it’s the former, how will reimbursements be strategized? First come, first served? Some sort of round robin scheme? Doesn’t sound particularly pretty.

BTW, somewhere or other I read the claim that Medicare is a right. It isn’t or at least it isn’t a right by any standard that I would use for such things. Here’s how I would define a right in this context. Medicare is a right if patients nominally covered under Medicare can sue to have specific procedures covered. Unless I’m very much mistaken they can’t. Not a right. A benefit.

Speaking of seething, here in Illinois we’re getting deluged by television spots from public employees’ unions trying to gin up sympathy for their members. Here’s one of them if you’re interested. I won’t embed it.

I think that public employees have a good argument in favor of their pension plans: they took deferred income rather than increasing past wages. But the argument that’s being made in the ad, “we paid for it”, is just plain stupid.

Let’s go to the back of the envelope. A Chicago police officer has 9% of his or her pay deducted for pensions and can retire at age 55 at (I think) 75% of terminal pay. My quick calculation suggests that 30 years of contribution pays for about four years of pension. How long do you think that 55 year old police officer will live? Ten years? Twenty? Thirty? More?

But the money could be invested (I hear somebody say). Two points. First, that’s making the Heritage Foundation’s argument for it: you’re implicitly arguing that people should be investing their own money rather than depending on a company-paid pension. Second, how much do you think can be earned with conservative investments? I don’t think a great deal but let’s say you’re able to triple your money.

That pays for twelve years. The 55 year old police officer is now 67. Now what?

The numbers just don’t add up. Public employees are receiving much, much more in benefits than they ever had deducted from their paychecks.

The biggest domestic story today is the economy and the most troubling component of the phlegmatic recovery that has been in progress for nearly two years now is the persistently high level of unemployment. Here’s President Obama’s latest explanation for high unemployment:

“The reason the unemployment rate is still as high as it is, in part, is because there have been huge layoffs of government workers at the federal level, at the state level, at the local level,” he said. “Teachers, police officers, firefighters, social workers– they have really taken it in the chin over the last several months. And so, what we’re trying to do is to see if we can stabilize the budget.”

Of course when you actually quantify the net layoffs in government at all levels that have occurred since 2007 it turns out that the layoffs aren’t nearly so huge and that you can’t explain unemployment as being due to layoffs from government. This is no secret. If you don’t believe me just go to the Bureau of Labor Statistics and start prowling around. The number of government employees at all levels is actually higher today than it was in June 2007.

To be honest I think we’re asking the wrong question. Rather than the question of the title of this post I think we should be asking why was employment so high? For that I think there are some ready answers at hand.

• We have had two successive bubbles
• The logic of bureaucracy.
• Demographics
• 50 years of stimulus

Economic activity is higher during a bubble than it otherwise would have been. After the inevitable collapse of the bubble not only does economic activity decline back to the baseline level, it will be below the baseline because billions of dollars of capital are stuck in relatively non-productive areas. If you subsidize these relatively non-productive areas (as we have), that will induce capital to be retained in these areas further further reducing the potential level of economic activity.

My point about bureaucracy is something I’ve had some difficulty explaining to people who are economics-minded. All large organizations are bureaucracies. In a bureaucracy power and influence are measured by how many people you have reporting to you. Consequently, in a large organization employees aren’t laid off when their marginal productivity goes to zero. They’re laid off only when the company goes into survival mode as was the case for many, many organizations during the Great Recession.

Subsidizing old, established, large organizations is perverse. Such organizations have been reducing the number of people on their payrolls (unfortunately, disproportionately hourly personnel) for decades. Young new companies grow and add jobs; old ones don’t. And yet we are much more likely to subsidize old, established concerns than new ones. We’re subsidizing unemployment rather than employment.

That’s why I seethed when I read this:

Gov. Pat Quinn says the state of Illinois will provide $100 million in tax credits to Motorola Mobility as part of a deal with the company to keep its headquarters in Libertyville.

Under the deal announced Friday, the company will keep a workforce of about 3,000 at the facility. Motorola Mobility, a split-off company of Motorola’s cell phone and cable TV set-top box divisions, is committing to spend more than $500 million in research and development related to these jobs over the next three years.

Gov. Quinn signed Senate Bill 4 Friday expanding the Economic Development for a Growing Economy (EDGE) tax credit, which was a determining factor in MMI’s decision to locate in Illinois.

Here’s the dynamics of this. First, Illinois raises taxes on businesses and individuals. Then it gives tax breaks to large established firms to keep them in Illinois. But remember the seen and unseen. For each Motorola Mobility there are dozens or hundred of companies not influential enough to get a break from the state. And there are dozens or hundreds more companies that will never get started, leave the state, or reduce their hiring plans because of the state’s policies.

Another reason for reduced economic activity is demographics. I’ve posted on this subject extensively. The cycle of American life is something like spend, spend, spend, spend, save, spend, die. The oldest Baby Boomers are in their mid-60s—they’re either in their “save” phase or in their terminal “spend” phase. Note that a good deal of that spending will inevitably be on healthcare.

The youngest Baby Boomers are nearing fifty. Over the next ten years all of them will have entered that last futile “save” phase and some exited it. As I have documented in earlier posts, this cohort has been wealthier at every stage than the cohorts that have followed it. That means less economic activity except, possibly, in healthcare and healthcare produces fewer jobs per dollars spent than many other sectors of the economy (that’s what it means when you say that wages in a sector are higher).

Finally, we have been stimulating the economy via Keynesian stimulus and subsidizing at a furious pace for the last half century. The stimulus has come at the expense of future growth and the future is now. Subsidies mean that billions or trillions are tied up in relatively unproductive use.

There is no quick or painless solution to these problems. I’ve already given my prescription: stop subsidizing banks, housing, agriculture, healthcare, education, aerospace, munitions, automakers, highway construction, and on and on endlessly. The subsidies come in the form of direct handouts and tax expenditures. Both should be reduced. We are in desperate need of some creative destruction.

Be concerned for those who are truly in need rather than trying to spread money around to keep everybody happy.

Because there is no quick or painless solution we’re likely to do nothing. Economic growth will be frustratingly and bafflingly low (to some). And unemployment and under employment will remain excruciatingly high.

I see that Megan McArdle has come around to my view of the GM bailout:

To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy. We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks–and over $100,000 a piece if we just wanted to break even against our losses on the common stock.

Me, in December 2008:

If we’re bound and determined to spend $5 billion a month for the sake of people who work in the auto industry, here’s my suggestion: pay the money to them directly. We don’t need GM or Chrysler for that. Let’s start a roster of people who’ve been laid off or fired from the auto industry. They’ll need a W-2 and documentation of the termination.

The estimate I’ve seen is that may be as many as 2 million people. If it’s that many and if you pay them directly, that would come to $2,500 per person per month. Not princely but enough to get by on.

While I’m on the subject of GM I wonder if anybody has noticed that the fix is in. The new guidelines for new acquisitions in the federal vehicle fleet call for more green autos, i.e. EVs and hybrids. Combine that with buying domestic. Can you say “directed bid”? I knew you could.

This gave me my chuckle for the day (I have a very dark sense of humor). The American Medical Group Association, an umbrella organization representing medical groups including such groups as the Mayo Clinic, has looked at the administration’s proposal for Accountable Care Organizations, one of the PPACA’s flagship strategies for delivering quality care to patients at an affordable cost, and become alarmed. Here’s a snippet (PDF) from the letter the organization sent to Donald Berwick, the chief administrator of the Centers for Medicare and Medicaid Services:

We write today, however, to express our serious concerns over the direction of the Proposed Rule. On its face, it is overly prescriptive, operationally burdensome, and the incentives are too difficult to achieve to make this voluntary program attractive. As you know, most policy experts believe multi-specialty medical groups are best poised to become ACOs in the short term. However, in a survey of AMGA members, 93 percent said they would not enroll as an ACO under the current regulatory framework.

In addition, the letter openly acknowledges something I’ve been saying around here for a long time:

Further, if ACOs are not successful, we are concerned that the only alternative to future delivery system “reform” will be draconian cuts across the provider spectrum. Such an approach would not change the way we deliver health care and ironically, would likely result in greater volumes of services provided.

or to paraphrase, if the reimbursement per procedure is reduced, we’ll jack up the number of procedures we perform to make up the difference.

Let me repeat this very plainly. We can’t afford to let the cost of healthcare increase at the present rate and we can’t reduce costs within the confines of the fee for service model. We need basic reform.

Hat tip: Associated Press