Author: R.A. | WASHINGTON

RECENT American economic news has been pretty good. Employment grew in March, activity in manufacturing and services is expanding, equity markets are rising—things seem to be trending in the right direction. Except in housing. Sales, starts, prices, and builder confidence have all weakened in early 2010, which is particularly worrisome given the end, in March, of Fed support for interest rates and the end, this month, of the government’s home-buyer tax credit.

The Federal Reserve is paying attention. This is from the newly released minutes of the March Federal Open Market Committee meeting (H/T Calculated Risk):

Participants were also concerned that activity in the housing sector appeared to be leveling off in most regions despite various forms of government support, and they noted that commercial and industrial real estate markets continued to weaken. Indeed, housing sales and starts had flattened out at depressed levels, suggesting that previous improvements in those indicators may have largely reflected transitory effects from the first-time homebuyer tax credit rather than a fundamental strengthening of housing activity. Participants indicated that the pace of foreclosures was likely to remain quite high; indeed, recent data on the incidence of seriously delinquent mortgages pointed to the possibility that the foreclosure rate could move higher over coming quarters. Moreover, the prospect of further additions to the already very large inventory of vacant homes posed downside risks to home prices…

The staff did make modest downward adjustments to its projections for real GDP growth in response to unfavorable news on housing activity, unexpectedly weak spending by state and local governments, and a substantial reduction in the estimated level of household income in the second half of 2009. The staff’s forecast for the unemployment rate at the end of 2011 was about the same as in its previous projection.

How serious this is isn’t easy to say. A return to sustained declines in home prices would be very bad news but also seems relatively unlikely. Continued stagnation is more probable. High levels of excess inventory and lacklustre sales will mean that construction won’t add very much to output or employment growth for some time. Meanwhile, a lack of price growth will mean that the slog out of negative equity is a long and hard one, and in the meantime reduced labour mobility will slow labour market adjustment. In other words, a weak housing sector will be a drag on employment, and so long as employment growth lags, recovery is in doubt.

THE OECD has released its latest economic outlook for member nations. It includes this interesting chart:

Just looking at that, with which country would you guess American leaders are most concerned, so far as global imbalances go?

Focusing on the bigger picture, the OECD report is generally positive. Recovery is likely to be sluggish across much of the OECD, and debt issues loom, but inflation is well in hand, financial conditions are generally good, and global trade has recovered nicely. The aggressive global response to what was, remember, a Depression-like shock to the economy has averted a Depression-like outcome.

TO BRING housing market discussions back to a more practical level, have a look at Felix Salmon’s write-up of Fannie Mae’s National Housing Survey, a detailed look at American views on the housing market. What it indicates, in a nutshell, is that after an extraordinary housing bubble and massive crash, Americans have basically learned nothing about the risks of homeownership. It’s hard to know which of the charts Mr Salmon reproduces is the most stunning (go look at them all), but this is certainly a candidate:

So to recap, home prices in almost every market in America have fallen over the past three years, and in the hardest hit markets, home values have declined by 50% or more from their peaks. One in four mortgage borrowers owe more on their mortgage than their home is worth, and millions of Americans have lost their homes to foreclosure. And yet Americans consider homeownership to be only slightly less risky than putting money in a savings account. Homes are highly leveraged and undiversified assets, and yet Americans—including those currently delinquent on a mortgage—think homeownership is safer than a diversified equity portfolio.

It wasn’t clear to me that American households would be as chastened by this crisis and recession as was the Depression generation, but I thought that having been bitten they’d be at least a little shy. Instead, they’re just waiting for the good times to get rolling again.

THE message in this Ed Glaeser post is one I wholeheartedly endorse—individuals expecting real home prices to rise are likely to be disappointed. But I’m not sure what I think about this:

The cautious home buyer should reflect on the fact that few places have the two preconditions for booming prices: restricted supply and a durable anchor for robust demand. Moreover, even if supply is restricted in one area, the odds are that some other place has similar assets and a greater willingness to supply homes.

Boston is a skilled metropolitan area and its restricted supply has led to high prices. But Atlanta is now a skilled metropolitan area as well, and its housing supply seems virtually unlimited. Why is it obvious that Boston can maintain a permanently higher price level than Atlanta?

America is filled with empty land. We have a remarkable transportation network that enables people to commute vast distances. We have an efficient construction industry that, when unfettered, is capable of producing vast numbers of high quality, affordable units.

The logic is pretty straightfoward. You have a collection of highly skilled workers in Boston, which makes it very attractive to be in Boston. Meanwhile, Atlanta also has some skilled workers, but not as many as Boston, and so Atlanta is somewhat less attractive. But housing supply in Boston is limited, and so rising demand for Boston leads to rising home prices, which encourages some subset of people to move to Atlanta, equilising the talent gap between the two metropolitan areas. And since housing supply in Atlanta is more flexible, the stable equilibrium is one in which Bostonians move to Atlanta until real housing prices in the two areas equilise (after controlling for other amenities and disamenities).

The potential snag in this theory is one to which Mr Glaeser refers: the “superstar city” hypothesis. In this telling, rising home prices in Boston lead some Bostonians to exit, but the ones that choose to leave are those with the most modest income potential. That is, the ones who think they’re unlikely to earn enough to keep up with housing costs leave for cheaper pastures. But this should result in a filtering of the Boston population for the most talented workers, while less talented workers leave for other metropolitan areas. The filtering mechanism means that the density of talent in places like Boston increases, which further increases the return to being in Boston, which means that divergence in home prices is sustainable.

I think there’s something to this, but Mr Glaeser seems to be arguing that if all you’ve got going for you is a pool of talented workers, rather than some other durable attraction, then ultimately, price increases will lead to convergence across cities. At some point, rising costs will filter out one too many skilled workers, the cheaper market’s talent pool becomes more attractive to all the workers in the pricey market, and the pricey market collapses.

But what if there are actually two different kinds of skilled worker?

Say that you have one kind of skilled worker who likes to live near other skilled workers for the mundane benefits of agglomeration: access to suppliers and clients and the advantages of a deep labour market. For this worker, any large, skilled market is an attractive place to be. Then there is another kind of skilled worker who enjoys those benefits of agglomeration but also the externality-oriented benefits: things like knowledge spillovers in specialised industries or Jacobs externalities, in which urban diversity breeds serendipitous opportunities. The first category of worker is happy to be in any collection of skilled workers. The second, on the other hand, needs to be among other externality-dependent skilled workers.

Now imagine a metro area half full of each kind of worker in which home prices begin to rise. The workers who are filtered out by price increases are those whose skills are not externality-dependent. Their departure makes the cheaper market more attractive to the first class of worker. It also makes the pricier market more attractive for the second class of workers, since it eliminates the upward cost pressure provided by workers who aren’t increasing the size of the pool of externality-oriented workers. In this world, rising housing costs stabilise the structure of cities, effectively filtering not by talent but by type. Any externality-oriented worker leaving the pricey market would enjoy cheaper housing and a potential change in metropolitan skill level, just like the first type of worker, but they would also face a downgrade of their own skills, unlike the first type of worker.

And while it might seem unlikely, it’s not impossible to imagine that attitudes toward housing supply could actually reflect these dynamics, such that cities with skills bases not particularly reliant on externalities support elastic housing supply while those home to externality-oriented industries favour tighter restrictions, the better to keep out free riders. In this world, the divergence in high and low cost markets could persist indefinitely, until a shock of some sort disrupted the value of the externalities holding high-cost cities together.

As a model of housing cost dynamics and metropolitan skill sets, I don’t know if this actually holds up. It does seem to me, however, that if the superstar thesis is wrong for most cities, as Mr Glaeser suggests, then price differentials between high and low cost cities are already sufficiently large to generate absolute population decline in most pricey cities. And that’s not what we’re observing.

HERE’S your quote of the day, from a new(ish) working paper by Alberto Alesina and Andrea Stella:

In 1947 at the end of the second world war there were 76 countries in the world. Today there are 193 (with a seat at the UN). Unless one believe that there is a natural “law” according to which each country has to have its own currency, either there were too few currencies in 1947 or there are too many today!

The paper includes a nice and detailed analysis of the successes and failures of the European monetary union. Crises are unpredictable, and the current European sovereign debt mess could end very badly, but it does seem to me that as member states really internalise the lesson that the single currency isn’t going away, the pace of structural reform in places which perceive themselves to be disadvantaged by policy in Frankfurt should increase.

VISUALISATIONS are fun:

Via.

TYLER COWEN quotes Paul Krugman:

So what the legislation needs are explicit rules, rules that would force action even by regulators who don’t especially want to do their jobs. There should, for example, be a preset maximum level of allowable leverage — the financial reform that has already passed the House sets this at 15 to 1, and the Senate should follow suit.

And he writes:

I favor this but I nonetheless think it remains problematic.  The more binding the leverage restrictions, the more banks and other intermediaries may try to recreate implicit leverage off the balance sheet…

[M]anaging off-balance sheet risk requires an ongoing, hammer and tongs approach.  There isn’t any “once and for all” solution to banking regulation and the harder we try to find one probably the more we will end up relying on regulator discretion and judgment…

And now we can return to why financial reform is hard to blog.  There’s always a new proposal and a big tizzy over the particular contents of that reform.  Whatever one thinks of the specific suggestions, I keep returning to the notion that the quality of the regulators — most of all Congress — truly matters.

I think both men are basically right. At any given point, regulators are subject to all kinds of pressures that might lead them to conduct their jobs with less zeal than the general public would hope, and so you want a system with clear benchmarks and reduced discretion. But the more effective the regulatory regime is, the greater lengths financial firms will go to in order to get around those regulations, at which point you’ll need officials willing and able to use their discretion to rein in dangerous or harmful activities. This obviously didn’t happen to an appropriate extent as the shadow banking system grew. And then, of course, if you manage to get good regulations and good regulators, legislators are likely to take advantage of the complacency that follows a well-regulated, crisis-free period to weaken the prevailing regime.

The takeaway is that over a long enough timeframe, crisis is inevitable. That doesn’t mean that the effort to craft better rules in the meantime is worthless. Periods of financial stability, like that in the postwar decades, are very good for sustained growth. But it’s best to be realistic. If you imagine that ideal regulations may exist, then you might mistakenly come to believe that you’ve stumbled onto them, in which case overoptimism will lead to crisis in no time.

HERE’S an interesting new research result from the Asian Development Bank Institute’s Willem Thorbecke:

Many argue that the yuan needs to appreciate to rebalance the People’s Republic of China’s trade. However, empirical evidence on the effects of a CNY appreciation on the People’s Republic of China’s exports has been mixed for the largest category of exports, processed exports. Since much of the value-added of these goods comes from parts and components produced in Japan, the Republic of Korea, and other East Asian supply chain countries, it is important to control for exchange rate changes in these countries. Employing dynamic ordinary least squares, or DOLS, techniques and quarterly data, this paper finds that exchange rate appreciations across supply chain countries would cause a much larger drop in processed exports than a unilateral appreciation of the yuan.

China has been arguing that America’s use of the full value of Chinese exports, rather than figures adjusted to reflect China’s value-added, vastly overstates the extent of the Chinese current account surplus. It’s important to consider the structure of Chinese production when thinking about these policy choices.

CORY DOCTOROW becomes the latest techie to slam an Apple product, in this case the iPad, for being too user-friendly and not tinkerer-friendly enough:

Then there’s the device itself: clearly there’s a lot of thoughtfulness and smarts that went into the design. But there’s also a palpable contempt for the owner. I believe — really believe — in the stirring words of the Maker Manifesto: if you can’t open it, you don’t own it. Screws not glue. The original Apple ][+ came with schematics for the circuit boards, and birthed a generation of hardware and software hackers who upended the world for the better. If you wanted your kid to grow up to be a confident, entrepreneurial, and firmly in the camp that believes that you should forever be rearranging the world to make it better, you bought her an Apple ][+.

But with the iPad, it seems like Apple’s model customer is that same stupid stereotype of a technophobic, timid, scatterbrained mother as appears in a billion renditions of “that’s too complicated for my mom” (listen to the pundits extol the virtues of the iPad and time how long it takes for them to explain that here, finally, is something that isn’t too complicated for their poor old mothers).

The model of interaction with the iPad is to be a “consumer,” what William Gibson memorably described as “something the size of a baby hippo, the color of a week-old boiled potato, that lives by itself, in the dark, in a double-wide on the outskirts of Topeka. It’s covered with eyes and it sweats constantly. The sweat runs into those eyes and makes them sting. It has no mouth… no genitals, and can only express its mute extremes of murderous rage and infantile desire by changing the channels on a universal remote.”

The way you improve your iPad isn’t to figure out how it works and making it better. The way you improve the iPad is to buy iApps. Buying an iPad for your kids isn’t a means of jump-starting the realization that the world is yours to take apart and reassemble; it’s a way of telling your offspring that even changing the batteries is something you have to leave to the professionals.

Note that the iPad isn’t a flat-screen television or a video game system. It’s a product designed, in no small part, to make it easy to consume huge amounts of media in many different forms—blogs, columns, papers, books. I suppose you might look at a clean, seemlessly-designed RSS reader as an infantilising piece of technology, serving up an obscene smorgasbord of reading material to a media glutton uninterested in understanding the delicate dance of code that makes it all possible. I see it as a life-changing way to easily explore a remarkably diverse array of topics, presented from a remarkably diverse array of perspectives. My reader provides me with a daily serving of reading material that is surprising, challenging, and intense; it’s how I found Mr Doctorow’s essay. If I had a clunkier technology in front of me, I might learn more about programming from trying to get the damn thing to work. But the time it took me to do that and the poorer quality of the technology would leave me less time to explore the world of knowledge I have available in my fancy, works-for-any-old-fool reader.

And it’s worth pointing out that Apple is building its products in response to consumer demand, and it seems to be doing a bang up job. The process of simplification of consumer goods in response to demand is what has delivered the enormous productivity gains that generate much of the wealth of modern life. This isn’t just about computing. One might make arguments like Mr Doctorow’s for just about any piece of technology in the average household. Think about light switches, for example. Homebuilders, these days, put all the wiring inside the walls where you can’t see it, and power is generated miles away from sources. Most people couldn’t generate a current if their life depended on it; they just know that if you flick the switch the light turns on and if it doesn’t you change the bulb or check the circuit breaker (the equivalent of hitting restart) before calling in the experts. Or, if you want to improve the loaf of bread you’re eating, you buy different bread—a long way from the old days when people had to learn to bake themselves. No doubt more bakers would be inspired if it weren’t so easy to buy a dizzying variety of prepared breads. On the other hand, fewer people would have time to start up tech companies or tinker with computers if bread weren’t so user-friendly. Perhaps something is lost in the erosion of amateur bread-making skills and universal home baking. But much is gained.

Simplicity has its benefits. And I suspect that real tinkerers won’t be deterred by the closed box of the iPad. They may use the user-friendly iPad to look up schematics (in a panic) for some other piece of family technology that’s lying disassembled on the floor. Or they might just find ways to break into the iPad. Either way, it seems clear to me that Apple is making society better off with its products. And if it’s leaving a bunch of would-be tinkerers disappointed, well, someone should get busy satisfying that market.

MY VIEW is that the American government’s approach to the Chinese currency issue has been pretty good, so far. Congress has been increasingly anxious to take some punitive steps against China, to try and get the Chinese government to allow the renminbi to appreciate. The White House, on the other hand, has not been bashful about letting its views on the Chinese currency be known. The Obama administration has said quite explicitly that the dollar peg is a macroeconomic problem and that China should take more steps to boost domestic demand. But it has declined to wave sticks at the Chinese government while carrying on a continuing dialogue with Chinese leadership. The administration seems to have the good sense to know that an aggressive stance might make for good populist politics, but it would likely delay a revaluation while potentially leading to a damaging increase in trade tensions between the two countries. An aggressive stance could be costly in other ways, as well; China and America are currently negotiating on a wide range of topics, from Iran to climate change.

So I think this doesn’t really add up. The Treasury Department had planned to release a new report on currency manipulation on April 15, and Treasury had faced significant pressure to officially label China a currency manipulator. Senate leaders have been demanding as much, and looking to follow such a declaration with the introduction of bills placing punitive surtaxes—tariffs—on imports from China. Treasury Secretary Tim Geithner announced yesterday that this announcement would be postponed. Why? Well, Chinese President Hu Jintao will be visiting America next week for a summit with Barack Obama. The administration seems optimistic that between the intense negotiations and the delay of the report, it can create breathing space for China to begin easing the peg. Markets appear to agree. As Scott Sumner points out futures on the Chinese currency rose on news of the delay, indicating that pushing back the report’s release increased the probability of revaluation. But my colleague sees a betrayal:

Do officials from State set benchmarks for cooperation on important issues, and then, if enough checks show up on the checklist, head over to Treasury and say, “Listen, guys, hold off on the currency report”? Or does the White House bring Treasury and State into the room and decide what will happen? Is there some kind of metric that weighs the value of a certain amount of cooperation on North Korea against a certain amount of international macroeconomic distortion? What if Treasury thinks the currency manipulation is too serious, and the diplomatic cooperation isn’t sufficient to warrant delaying the report? Or perhaps Treasury never really wanted to state the obvious on Chinese currency manipulation, and the diplomatic progress gives them an excuse? How do they plan to win Chuck Schumer over?

If all this stuff does gets decided in meetings between State, Treasury and the White House, I sure hope some paranoiac is surreptitiously making digital recordings so that eventually, some years down the road, we find out what actually went down.

So once again, markets seem to have concluded that the softer line with China has made revaluation more likely. But let’s see just how hard the administration is working to avoid stating the obvious on Chinese currency manipulation. Here is Mr Geithner’s statement upon announcing the delay of the currency report:

As part of the overall effort to rebalance global demand and sustain growth at a high level, policy adjustments are needed that measurably strengthen domestic demand in some countries and boost saving in others. These are also important to ensure robust job growth. In the United States, private savings has increased, the current account deficit has fallen, and the President has outlined a series of measures to reduce our fiscal deficit.

Countries with large external surpluses and floating exchange rates, such as Germany and Japan, face the challenge of encouraging more robust growth of domestic demand. Surplus economies with inflexible exchange rates should contribute to high and sustained global growth and rebalancing by combining policy efforts to strengthen domestic demand with greater exchange rate flexibility.

This is especially true in China. China’s strong fiscal and monetary response to the crisis enabled it to achieve economic growth of nearly 9 percent in 2009, contributing to global recovery. Now, however, China’s continued maintenance of a currency peg has required increasingly large volumes of currency intervention. Additionally, China’s inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate. A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing.

This is basically the worst cover-up ever. As you can see, Mr Geithner clearly has no trouble explaining that China is intervening to support the dollar, which has the effect of delaying aspects of global rebalancing. Having said all this, it would sure make the administration look bad if no progress was made in encouraging the Chinese to revalue. Given that presidents really don’t like to look bad, particularly ahead of Congressional elections, one might conclude that the administration is doing what it’s doing because it thinks that its current strategy is the most effective way to get what it wants. I’m inclined to agree.

IT WAS about one year ago that the phrase “green shoots” began being batted around, as economic trends which had been deteriorating at an increasing pace started deteriorating at a declining pace. Such were the small victories celebrated early last spring. By late summer, a number of important economic indicators—including GDP—had moved all the way back to expansion, and many economists felt comfortable asserting that the recession was officially over. But for the next nine months, there was little sign that the recovery was feeding back through to the labour market, or that it would prove particularly durable in the absence of government supports.

As of the first full week of the second quarter of 2010, it seems possible that yet another economic hurdle has been leapt, and a self-sustaining recovery appears within reach. The latest data releases from the Institute of Supply Management show that the manufacturing sector grew in March for an eighth consecutive month, and at the fastest pace since 2004. Service sector activity expanded in March for a fourth consecutive month, and at the fastest pace since 2006. Meanwhile, equities, commodities, and interest rates have all ticked upward in recent weeks, a fairly good indicator that markets are increasingly confident about the state of recovery.

But while growth in commodities prices is a positive sign, it’s also a potential threat:

That’s the price of a barrel of oil over the past year. As the global economy has continued to move away from the abyss, the price of crude has climbed back to near $90 a barrel. Increases much beyond that will begin to squeeze household budgets in places heavily dependent on oil. If those increases happen slowly, then they won’t be that damaging; households will have time to adjust commutes, buy more efficient vehicles, and find other ways to substitute away from petrol. If they happen rapidly, then the result will be enough damage to consumer spending to tip the American economy back toward, and perhaps into, recession.

There’s really not much that can be done about this in the short term. Officials simply need to hope that households have continued to reduce their exposure to petroleum prices in the wake of the 2007-2008 spike in the cost of crude.

OVER the weekend, I mentioned some research indicating that rapid population growth can tighten housing markets, helping to reduce the incidence of liquidity traps. As it happens, population trends might also shape the path of equity returns:

Geanakopoulos and his co-authors consider an overlapping generation model in which the demographic structure mimics the pattern of live births in the US, that have featured alternating twenty-year periods of boom and busts. They conjecture that the life-cycle portfolio behaviour – which suggests that agents should borrow when young, invest for retirement when middle-aged, and live off their investment once they are retired – plays an important role in determining equilibrium asset prices. Consumption smoothing by the agents, given the assumed demographic structure, requires that when the middle-aged to young population ratio is small, there will be excess demand for consumption by a large cohort of retirees and for the market to clear, equilibrium prices of financial assets should adjust, i.e. decrease. The result is that saving is encouraged for the middle-aged. As the dividend/price ratio is negatively related to fluctuations in prices, he model predicts a negative relation between this variable and the middle-aged-to-young ratio.

In a recent CEPR Discussion Paper (Favero et al. 2010), we take the Geanakopoulos et al. model to the data via the conjecture that fluctuations in the middle-aged-to-young ratio could capture a slowly evolving mean in the dividend price ratio within the dynamic dividend growth model. We find strong evidence in favour of using this variable together with the dividend/price ratio in long-run forecasting regressions for stock market returns…

Somewhat reminiscent of a 2005 paper by Dean Baker, Brad DeLong, and Paul Krugman:

We in America are probably facing a demographic transition—a slowdown in the rate of natural population increase—and possibly facing a slowdown in productivity growth as well. If these two factors do in fact push down the rate of economic growth in the future, is it still prudent to assume that the past performance of assets is an indication of future results? We argue “no.” Simple standard closed-economy growth models predict that growth slowdowns are likely to lower the marginal product of capital, and thus the long-run rate of return. Moreover, if you assume that current asset valuations represent rational expectations, simple arithmetic tells us that it is next to impossible for past rates of return to continue through a forthcoming growth slowdown. Only a large shift in the distribution of income toward capital or current account surpluses larger than those of nineteenth century Britain sustained for generations give promise for reconciling a slowdown in future economic growth with a continuation of historical asset returns.

More attention should probably be paid to the effect of long-wave demographic shifts on markets and economies, as especially on divergent reactions to shocks.

I SUSPECT that reading these constant back and forths can grow tiresome, so I’ll move on to other topics after addressing Scott Sumner’s latest replies to this discussion. Here, Mr Sumner writes:

The NYC area is gaining people because of its amenities, and perhaps because of productivity gains flowing from agglomeration.  DC gains people for obvious reasons that have nothing to do with its economic model.  The other 60% 0f the Metroplex (including Massachusetts but excluding low tax New Hampshire) is gradually losing people to places like Texas.  We will lose another Congressional seat this census.  Right around Boston and Cambridge things are still vibrant–due to Harvard, MIT, Mass General, etc.  But the rest of the state is not that appealing from an economic perspective.

I really think Mr Sumner is just being too slipshod with the data. The Washington metropolitan area is home to over 5 million people, most of whom do not work for the government. The region has a thriving science and technology sector that drives much of the metropolitan area’s growth. Obviously, this sector has direct connections with the government, but Silicon Valley also grew out of businesses heavily reliant on government contracting. Basically every state in the Northeastern metroplex has seen steady population growth over the past decade. Cities within the metroplex that were rapidly losing population during the 1980s and 1990s, like Washington and Philadelphia, are now experiencing population growth. Not every city in the metroplex is enjoying growth from domestic migration (though some are, including Boston and Washington). But they remain magnets for international migration. And perhaps it’s due to the effect of the Boston area, but the state of Massachusetts as a whole gained domestic migrants from 2008 to 2009.

Mr Sumner had previously written:

But if you compare equals—an uninteresting manufacturing city in New York state and/or Massachusetts with an equally uninteresting manufacturing city in Texas—then it is very clear where people are moving.

And I asked:

Meanwhile, who is moving to uninteresting manufacturing cities in Texas?

Mr Sumner answered back:

As far as who is moving there, I don’t know their names.  But I seem to recall reading that last year the Dallas and Houston areas each gained over 140,000 nobodies, which is far more than any other city in America.  Austin gained 50,000, but because it is much smaller that represented a slightly higher percentage rate of increase than for Houston and Dallas.  But I’d say 280,000 people is pretty impressive one year in-migration for the big two.

Dallas, Houston, and Austin are not uninteresting manufacturing cities. I never disputed that big Texas metropolitan areas were growing. He goes on:

And I didn’t mean to suggest that other places aren’t growing fast.  Most have at least slightly more pleasant climates or geography (Arizona, Denver, Florida, etc.)  I presume that North Carolina and Georgia also have good economic models.  I know that in Georgia there are sizable suburbs that have virtually no government at all, everything is contracted out.  That sounds like a libertarian paradise.  But I still say Texas has done dramatically better than the rest of the south central US, and I claim it is due to their superior economic model.  It’s now hard to believe, but New Orleans was once a rival to Houston for attracting oil companies.

He goes back to crediting climate, ignoring the paper to which I originally linked, by Ed Glaeser, which noted:

[I]t seems that the growth of the Sunbelt has little to do with the sun.

Neither has he discussed, at all, the focus of that paper, which indicates that rapid population growth in the Sunbelt, including Texas, is not indicative of overwhelming growth in demand for Sunbelt metropolitan areas but to rapid growth in housing supply. Meanwhile he “presumes” that other rapidly growing states have good economic models. But earlier he argued that Texas’ rapid growth relative to other Sunbelt states was largely attributable to its lack of a state income tax. Colorada, North Carolina, and Georgia all have income taxes.

Texas’ economic performance and its growth performance have been impressive, and certainly good policy choices have contributed to its success. But the bottom line is that the growth is concentrated in metropolitan areas that aren’t that unique in the context of the Sunbelt. Take any one of a half-dozen large metropolitan areas and add an energy industry and you get the performance you have in Dallas or Houston. But is the data on economic performances and migration consistent with a story in which Texas has a clearly superior model which is draining people and business from high-cost, high-regulation states on the coasts? No, it’s not. Finally, from this post:

As I said in my first post on this issue, I think it might make more sense to view the entire progressive policy regime as a single choice:

Why is per capita GDP in Western Europe so much lower than in the US?  Mankiw seems to imply that high tax rates may be one of the reasons.  I don’t know if that’s the answer, but if it’s not my hunch is that the factors that would explain the difference are other government policies that the left tends to favor (strong unions, higher minimum wages, more regulation, generous unemployment insurance, etc.) 

Do we buy into the European model or not?  If we do, let’s not kid ourselves that we can avoid a big hit to GDP/person.

I don’t want to speak for all progressives or all those on the left, but this seems like a very significant caricature of the agenda of America’s left, and of the European model, which actually contains quite a lot of policy diversity. You can have fairly high tax rates in tax structures with wildly different efficiencies. You can provide a comprehensive social safety net in ways that affect incentives in wildly different ways. Some on the left adopt a labour protection and minimum wage approach, but many others are essentially on-board with the wage subsidy strategy facoured by economists and conservatives, based on incentive effects. The notion of “more regulation” is entirely meaningless. Perhaps it counts as more regulation to price carbon, or to enforce limits on bank leverage. Are these the kinds of things that are likely to lead to a poorer and more sclerotic national economy?

The debate, as set up by Mr Sumner, is too vague to be worth having. If you ask me would I like to see America import Italy’s economic institutions wholesale, I’d clearly say no, no way. If you ask me whether Europe contains examples of policy choices that can improve economic efficiency, economic mobility, and general welfare—that are in fact better than American policy options—I’ll absolutely say yes. And we can debate those policies. But it seems absurd to “presume” good models in one place and lump hugely different policies elsewhere into a caricature of a model and then compare the two using a strange measure of taxes paid person and data on population moves presented without context.

SCOTT SUMNER quotes Stefan Karlsson:

I have frequently discussed how growth in the Australian economy is driven by rising commodity prices. There is however another factor driving growth, namely high population growth.

Australia’s population grew by 2.1% in the year ending September 2009, a lot higher than in most other advanced economies (typically population growth is less than 1%, and even negative in for example Germany and Japan). This has a particularly positive effect on the housing sector, which continues its long boom, despite high prices and interest rates that are higher than in most other countries.

As this article points out, the rapid population growth has contributed to a housing shortage, something which implies that both construction activity and house prices will continue to increase.

A long time ago, I mused on the possibility of a migratory stimulus, in which workers leaving bubble markets for places with better prospects caused housing and labour markets in the destination cities to tighten, supporting new investment and touching off recovery. Of course, you could also take things in a different direction. Ed Glaeser has written that because housing is durable, its supply does not adjust with broader economic decline and out-migration. And so in cities like Detroit, you have a constant housing supply with a falling population, which leads to steady declines in home prices. These declines lead, in turn, to underinvestment, which continues the cycle of decline. One way to avoid this problem, then, might be to destroy surplus housing, in order to artificially tighten housing markets (and reduce the fiscal burden on local governments of maintaining underused infrastructure).

Mr Sumner takes yet a different direction, connecting the decline in asset prices in 2007 with reduced expectations for housing demand growth, associated with tighter restrictions on immigration. And obviously some pundits have argued that America should grant a visa to any would-be immigrant willing to purchase a home in the inland empire.

A broader point would be that population growth seems to be an advantage in getting through and out of deep recessions, particularly where liquidity traps are concerned. One has only to think of the Japanese example, relative to the experience in Australia (or America) to see this in action.

YESTERDAY, I wrote:

[C]an we really say, in a world in which the sunk cost fallacy has power, that the broken windows fallacy is a fallacy?

Will Wilkinson turns the snark up to eleven, but he seems not to have actually grasped the point:

Yes, losing a leg could shake you from a long habit of complacent bitterness and awaken you to all the wonderful things in life you had come to take for granted. When the town rallies together to put on a show to raise money to replace the gym that was wiped out by the twister, the town might indeed become a friendlier place to live. Suppose your husband dies from a gunshot to the gut and you end up liking your second husband even better. What then? Huh? Huh?

Losing a leg or a husband with which you’re perfectly happy are not, as it happens, examples of the sunk cost fallacy. I’m perfectly happy to agree that, in general, destruction entails economic loss. But Mr Wilkinson seemed to be arguing that nothing good ever came of disasters, and that seems profoundly wrong to me. Because of the sunk cost dynamic, on the one hand. And because disasters may often disrupt entrenched interests.

SCOTT SUMNER has replied to the post I wrote yesterday, and I just want to make a few additional points. He writes:

At no time did I argue that tax rates drove the disparity between the incomes of all countries.  Indeed I cited the Congo and Afghanistan as examples of how that could not possibly be true in all cases.  I also contrasted Italy and France.  Rather I suggested that the disparity between Western Europe and the US might be largely driven by different tax rates.

But he hasn’t begun to explain why this should be the case. Japan and France are both highly developed countries, with a high level of technological and institutional congruence. Their levels of per capita output are nearly identical. But France raises much, much more revenue as a share of output than does Japan. Why should revenue share have, apparently, very little effect on that output relationship but a comparatively enormous effect on the relationship between outputs in western Europe and America? Mr Sumner notes:

I seem to recall that when French tax rates were at US levels (about 50 years ago I believe) the French worked just as much as Americans.  If so, then this would seem to conflict with the argument that greater European leisure time reflects cultural differences.

I mean, really? Yes, it might mean that tax rates are all important. But the French economy has changed just a little bit over the last half century. Note that I’m not arguing that the structure or rate of taxation has no effect on incentives or on economic performance. I’m just saying that this playing around with taxes paid per person doesn’t begin to shed a light on the issue of inter-economy differences in economic performance. It certainly doesn’t begin to justify the sweeping conclusions Mr Sumner has drawn. He goes on:

Well if Singapore and HK are unrepresentative, then Norway and Luxembourg are even more unrepresentative.  Everyone knows that Norway is just Sweden with lots of oil.  Take away the oil and Norway would probably be no richer than Sweden and Denmark.  Oil extraction isn’t really “income,” it’s running down a stock of wealth.  And Luxembourg?  Why stop there?  Let’s include all the rich postage stamp countries–Bermuda, Liechtenstein, Monaco, etc.

Yes! Norway and Luxembourg are unrepresentative. That was one of the points I was trying to make. Hong Kong and Singapore are also highly unrepresentative. If you want to make these comparisons across metropolitan areas, then I’m happy to do that. I suspect that the results will tend to undermine rather than support Mr Sumner’s arguments.

He then says:

I agree that if areas have outstanding amenities (like NYC and SF, and to a much lesser extent Boston) then they can extract rents from highly skilled people who appreciate their sophistication and the ability to interact with other highly skilled people.  But if you compare equals—an uninteresting manufacturing city in New York state and/or Massachusetts with an equally uninteresting manufacturing city in Texas—then it is very clear where people are moving.

I’d first say that this is a bizarre view of urban economics, and one that entirely ignores the well documented relationship between urban density and productivity. Most of the  millions upon millions of people who live in high cost metropolitan areas—note that there are some 60 million people living in the relatively high cost metroplex between Washington and Boston—aren’t doing so because they merely want to interact with smart people and play sophisticate. They do so because it pays, because productivity and wages are higher. They have to be! If workers in such areas weren’t more productive, then they couldn’t afford to pay higher wages, and if they couldn’t afford to pay higher nominal wages, then real wages would be well below levels elsewhere, which isn’t sustainable. Meanwhile, who is moving to uninteresting manufacturing cities in Texas? The fastest growing metropolitan area in Texas is Austin. Austin’s industry mix is most similar to that in places like Raleigh, North Carolina (which is growing more rapidly) or Boston or San Francisco, where people continue to move.

Finally:

I was touting Texas, not the Sunbelt.  Texas isn’t just doing better than its neighbors (Oklahoma, Arkansas, Louisiana, Mississippi, New Mexico, etc), it is doing dramatically better.  And all those states I just mentioned are warm and have plenty of available land and very low housing prices.  They also have income taxes, something Texas lacks.

This is the kind of argument that should probably include some sense of what criteria and data can be provided in support. Atlanta is roughly as rich as the big four Texas metropolitan areas, and it’s growing roughly as fast. Charlotte and Raleigh, in North Carolina, are about as rich and enjoying much the same level of population growth (the Raleigh metropolitan area is growing faster than any of the four large Texas metropolitan areas). Same story for Denver. Texas is unique in that it has four large, rapidly growing metropolitan areas, but taken individually, its cities aren’t that extraordinary. The Washington metropolitan area, for that matter, is much richer than any large Texas city, and costlier, and it’s growing nearly as fast in terms of population.

The point, again, is that growth is complicated. Things like tax rate, and tax structure, and regulatory mix, and overall regulatory burden—they all have their place in the story. The kind of analysis that Mr Sumner is using here is just counterproductive to efforts to understand what is really driving disparities in economic performance.

I AM going to have to disagree with my colleague at Democracy in America once more. Regarding Barack Obama’s decision to allow drilling in areas off the Atlantic, Gulf, and Alaskan coasts, he notes that the politics may make sense, but the environmental angle does not:

As energy or environmental policy, however, I can’t see any logic. The problem runs deeper than David Roberts’s point (“The impact on oil prices will be ‘insignificant,’ says the Energy Information Administration, and it won’t make America any less dependent on foreign oil, either”). It runs deeper than Frances Beinecke’s point (“Better running cars and more efficient use of existing oil fields can help us make the transition into the 21st century without harming marine life or marine jobs.”) It runs deeper than John Broder and Clifford Krause’s point (“Risk Is Clear in Drilling; Payoff Isn’t“). The fundamental problem is this: there is a finite amount of fossil fuel. The more of it we find and burn, the more carbon we put into the atmosphere, and the more severe the greenhouse effect becomes. Once the carbon is in the atmosphere, it stays there. If we want to limit climate change, what we have to do, one way or another, is to leave fuels in the ground wherever possible, not find and burn them.

The problem is this: if you follow this line of thinking to its natural conclusion, then you have to declare that America should immediately stop all extraction of fossil fuels, right now. Now perhaps this is what my colleague believes that we ought to do. I don’t. The cold turkey approach to fossil fuels would be extraordinarily costly to the American and global economies, and it would cause a great deal of human suffering.

It isn’t enough to note that carbon emissions are generating warming, that warming is costly, and that the burning of fossil fuels produces carbon emissions. To arrive at sound policy conclusions, there needs to be some attempt to discuss the relative costs and benefits of various approaches to emission reductions.

So, there is some gain to producing a barrel of oil. It can be used to generate energy, which can be put to various productive purposes. There is value in that energy, which is why it is economically desirable for companies to go dig this stuff up out of the ground. But of course, there is a cost to producing a barrel of oil. There are local environmental impacts and there is the global negative externality associated with the emission of greenhouse gases. Now ideally, you put a price on carbon by taxing it or capping it and selling a limited set of allowances. That carbon price would raise the cost of oil which would reduce market demand and change the economics of drilling; whether it would still make sense or not to drill the off-shore areas is difficult to know in advance.

But we don’t have a global carbon price, at present. Instead, we can point out that because this is a relatively insignificant amount of oil and because oil is fungible and supply is somewhat flexible, drilling won’t meaningfully change the total amount of carbon emitted. There is also some substitutability between oil and other fossil fuels (and natural gas, which is also found in the off-shore areas) and so its difficult to know how drilling might alter the composition of fossil fuel consumption; if coal burning is marginally reduced, then the net effect could be a reduction in greenhouse gas emissions.

And most importantly, the production of this new oil won’t reduce oil prices, which means that it won’t encourage additional consumption of oil, and it won’t change behaviour toward greater dependence on oil.

In the end, reduction of fossil fuel consumption and carbon emissions is all about the demand side—the supply of fossil fuels on earth is more than sufficient to turn the planet into an oven, and so demand must be rationed. So either you commit yourself to disrupting enough of currently available fossil fuel supply to raise fossil fuel prices, or you quit worrying about supplies and focus on demand-side measures. The former seems to me to be utterly impossible and not that economically desirable, and so I’d urge my colleague to concentrate on the latter.

THIS morning’s employment report, out of Bureau of Labour Statistics, provides some of the most reassuring data on the American labour market that we have seen since the recession began. In March, payrolls increased by 162,000 workers, the largest increase since early in 2007. The figure was actually somewhat below economist expectations. Analysts were anticipating a large number thanks to continued improvement in the economy, a snap back effect from a snowy February, and the hiring of tens of thousands of temporary workers to help complete America’s decennial census. But while the headline figure was somewhat disappointing, revisions to earlier months slightly improved the employment picture as of the beginning of 2010. February’s previously reported 36,000 decline in payroll employment was revised upward to a drop of just 14,000. And the 26,000 decline initially reported for January was revised to a 14,000 worker gain. The American economy has now added jobs in three of the last five months.

Around 48,000 of the total gain was attributable to hiring for the census. Temporary help services contributed an additional 40,000 workers to the total, and the health and education sector, a job growth stalwart, accounted for 45,000 new hires. Construction, manufacturing, and retail trade enjoyed smaller increases, while employment declined for financial activities and information industries. State and local governments were once more a net drag on employment.

The unemployment rate held steady at 9.7%, as labour force growth continued. Unemployment rates for most worker categories weren’t meaningfully different. It will take sustained payroll increases around the March level to bring down unemployment rates.

Some worrying signs continue to lurk in the data. The number of people working part-time for economic reasons—either because their hours have been trimmed back or no other jobs are available—rose yet again, and now 9 million Americans fall into this category. Average hourly earnings ticked down in March, indicating that amid an extremely slack labour market there is little impetus for increases in wages and incomes.

And the problem of growing long-term unemployment continues to loom large. Just over 400,000 new workers moved into long-term unemployment in March, bringing the total in that category to 6.5 million. Long-term unemployed continue to occupy an increasing share of all unemployment; the rate is now almost 44%. The rate at which the long-term unemployed return to the workforce is well below that for other unemployment durations, so as the share of long-term unemployed increases that pushes back the time at which the American labour market can be expected to return to something like normal. A recent study of the labour market suggests that had the distribution of unemployed workers following the 1982 recession looked like the current distribution, recovery could have taken twice as long. That’s a longer period during which elevated unemployment is placing a drag on the economy and on government budgets, and a longer period during which elevated unemployment is acting to hold down wages. And the American economy has yet to get to the point where the stock of long-term unemployed is decreasing; that category continues to grow.

So while this is, on the whole, a positive report, it is not a report that significantly changes the image of the American labour market. Current trends—toward a long, slow, and painful return to normal—remain as they were before.

IN YESTERDAY’S Link exchange, I said that Greg Mankiw should be embarrassed by this post, in which he notes that in terms of taxes paid per person, Americans are right in line with most other developed nations. That is, if you multiply tax revenue shares of GDP by per capita GDP you get a number (about $13,000 for America) that is roughly in line with the number you get for Britain or Canada. As Matt Yglesias noted, this particular data comparison tells us almost nothing about the ability of an economy to handle increased tax rates (or whether or not that would be a good idea). It’s too clever by half.

Scott Sumner basically says that indeed, Mr Mankiw’s silly post was worth attacking. But he then unwisely decides to be contrarian for the sake of being contrarian. This measure could actually be interesting, he hints, in that it could tell us something about the impact of tax rates on output:

Here’s the $64 dollar question for which I’ve never seen progressives provide a satisfactory answer.  Why is per capita GDP in Western Europe so much lower than in the US?  Mankiw seems to imply that high tax rates may be one of the reasons.  I don’t know if that’s the answer, but if it’s not my hunch is that the factors that would explain the difference are other government policies that the left tends to favor (strong unions, higher minimum wages, more regulation, generous unemployment insurance, etc.)  So I think Mankiw is saying that if we adopt the European model, there really isn’t a lot of evidence that we’d end up with any more revenue than we have right now.

That tax rates are driving the disparity in incomes is belied by the very data presented in Mr Mankiw’s initial post. His computation uses four economies with per capita incomes clustered closely together: France, Germany, Britain, and Japan. But while per capita outputs in those countries are very similar, the revenue shares of GDP are wildly different, ranging from 46.1% for France to 27.4% for Japan. And of the four, Japan’s per capita income is the lowest.

Mr Sumner tries to get around that by saying that if it’s not taxes, well then it must be some other favoured policy of the left. And:

Further evidence for this hypothesis is that the few developed countries that do have much lower tax rates than the US (Hong Kong and Singapore) now have much higher per capita GDPs (PPP) than Western Europe.  Yes, they are small and urban, but Western Europe is full of small countries of about 6 million people that have less than 5% of the population in farming.

True. But Norway and Luxembourg are richer than Hong Kong, Singapore, and America, and they have higher tax takes as a share of output. It’s almost as if it’s foolish to just cherry pick pieces of data on revenues as a share of GDP versus per capita GDP in order to make a point.

But then Mr Sumner gets really deep into it, citing Texas the epitome of the American economic model and arguing that it is especially dynamic and successful based on the fact that its population has been growing rapidly while Americans have been moving away from “states with fiscal policies more to the liking of progressives like Yglesias and Krugman”. Certainly, Texas has its upsides. I noted earlier today that better regulation of mortgage lending helped the state avoid a debilitating wave of foreclosures (I suspect that both Mr Yglesias and Mr Krugman would approve of said regulation).

There are multiple problems with these arguments, but I’ll stick with just two of them. First, Americans are moving to Texas, but they’re also moving to lefty bastions like Boston and San Francisco, both of which enjoyed net domestic in-migration from 2008 to 2009, according to brand new Census figures. That’s right, they’re moving to what some refer to derisively as “Tax-achusetts”, even with the comprehensive health insurance coverage. The second point is that Mr Sumner should familiarise himself with an important body of literature on housing markets and migration. I’ll just briefly quote real estate economist, Massachusetts resident, and conservative Ed Glaeser:

In the last 50 years, population and incomes have increased steadily throughout much of the Sunbelt. This paper assesses the relative contributions of rising productivity, rising demand for Southern amenities and increases in housing supply to the growth of warm areas, using data on income, housing price and population growth. Before 1980, economic productivity increased significantly in warmer areas and drove the population growth in those places. Since 1980, productivity growth has been more modest, but housing supply growth has been enormous. We infer that new construction in warm regions represents a growth in supply, rather than demand, from the fact that prices are generally falling relative to the rest of the country. The relatively slow pace of housing price growth in the Sunbelt, relative to the rest of the country and relative to income growth, also implies that there has been no increase in the willingness to pay for sun-related amenities. As such, it seems that the growth of the Sunbelt has little to do with the sun.

Neither does it have much to do with the brilliance of the Texan economic model. Rather, it seems that housing supply growth in places like Boston can’t keep up with high housing demand, which has led—just as economics predicts—to rapidly rising house prices. And rapidly rising house prices—just as economics predicts—ration population growth. Price sensitive households end up following housing supply growth, of which there is a great deal in the state of Texas. To put things simply, if there weren’t a high level of demand for housing in those oppressive Northeastern cities, then prices couldn’t be held at a level so much higher than those in Sunbelt states. But the price differential remains.

There are many lovely things about the state of Texas, as The Economist has pointed out in the past. But it isn’t uniquely representative of American-style economic growth, nor is it a uniquely successful or dynamic part of the American economy.

To summarise: it’s often unwise to cite a few misleading data points in defence of a sweeping argument about economic dynamism.

THE case for getting tough with China continues to seem extremely tenuous. Today, Tyler Cowen links to a couple of good resources on the subject. Here‘s a relatively new paper by Ray Fair, for instance, the abstract to which reads:

This paper uses a multicountry macroeconometric model to estimate the macroeconomic effects of a Chinese yuan appreciation. The estimated effects on U.S. output and employment are modest. Positive effects on U.S. output from a decrease in imports from China are offset by negative effects on U.S. output from increased inflation and from a decrease in U.S. exports to China because of a Chinese contraction.

And here‘s a Financial Times piece that notes:

With respect to domestic demand in China, there is rather clear evidence that, if anything, it is currently too strong, and certainly not at a level to justify accusations that China is not doing its “bit” for the world economy. For about 13 years we have used our own proprietary gross domestic product indicator for China, the so-called Goldman Sachs China Activity index. At the moment, this is growing at an annual rate of more than 14 per cent. Indeed, and somewhat ironically, it is likely that if Washington and others could keep quiet, Chinese policymakers would probably be more eager to do things to ease the inflationary pressures arising from this growth, including introducing more flexibility to the exchange rate…

As far as China’s involvement with the rest of the world goes, the real story since the worst of the crisis is not China’s recovering exports but China’s strong imports. The forthcoming trade release – interestingly due a few days before the Treasury report – is likely to demonstrate enormous import growth again, absolutely and relative to exports. This is seen not just in Chinese data, but in those from many other important trading nations. Indeed, quite remarkably, Germany’s trade with China is showing such strong growth that by spring next year, on current trends, it might exceed that with France. China last year reported a current account surplus of 5.8 per cent of GDP, significantly lower than apparently assumed as the current level by many people in Washington. In 2010, it could be closer to 3 per cent – incidentally below the 4 per cent level deemed as “equilibrium” by the Peterson Institute for International Economics.

I particularly appreciate the FT‘s invocation of the Peterson Institute and its suggestion that an American policy of keeping quiet would be most helpful. Just today, Real Time Economics published an interview with the Peterson Institute’s Fred Bergsten, which contains this exchange:

Would these tactics make it more or less likely that China would revalue its currency?

Bergsten: I think that in the short run, it would be a little less likely. But one or two or three months out, it would be more likely. China wouldn’t want to have long period where there are multilateral cases against it.

In ‘X’ months down the road, based on internal considerations, they’ll let the currency rise. Short run, they’d huff and puff.

But the New York Times has a story up right now which reads:

[T]he announcement by Chinese authorities on Thursday that President Hu Jintao will be visiting Washington in two weeks is being seen as the beginning of a possible easing of the friction over the renminbi.

China experts said it was unlikely that China would have agreed to the visit unless there was at least an informal assurance by the Treasury Department that it would not be named a currency manipulator either on April 15 — the deadline for the Obama administration to submit one of its twice-a-year reports on foreign exchange to Congress — or in the ensuing weeks.

At the same time, economists say the visit, and other Chinese moves, suggest China is finally willing to let the renminbi increase in value.

In other words, the tactics Mr Bergsten wants to use in confronting China are quite likely to increase the time it will take China to revalue. But perhaps they will have made American leaders feel better, for having been “tough”?