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Why Housing Might Just Be Bad For The Economy

What we call real estate– the solid ground to build a house on– is the broad foundation on which nearly all the guilt of this world rests.

-Nathaniel Hawthorne, The House of Seven Gables

I read a piece the other day by Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, on the Bloomberg website that I thought was very interesting— and controversial. Shales talked about the idea that housing, in general, might actually be bad for the U.S. economy. The Bloomberg News columnist wrote:

But what if houses aren’t a haven but a prison? What if even a booming real estate market itself is a problem? That’s the theory of a winning Phelps — not Michael Phelps, the Olympic swimmer, but Nobel Prize economics laureate Edmund Phelps of Columbia University. Phelps deplores the collective energy Americans spend on family housing.

“It used to be said that the business of America was business,” Phelps says. “Now the business of America is homeownership.” To grow optimally, he says, America needs to get beyond its house passion.

Shlaes noted Phelps’ different reasons as to why housing is bad for the economy. She wrote:

Like an apartment building, the Phelps argument works on multiple levels. The first is obvious. The federal government allocates too many resources to housing. Back in 2005, when the troubles of Fannie Mae and Freddie Mac weren’t yet commanding the front page so regularly, the government was already spending about $41 billion to subsidize housing directly… More than triple that amount, or $147 billion, was foregone on indirect tax subsidies to homeowners.

That chunk of change might have been used for any number of government projects that would appeal to everyone from Laura Bush to Dennis Kucinich: pounding percentages into fifth-graders’ heads, lowering the capital-gains tax, declaring summer gas holidays — you name it.

The real estate obsession is also a private-sector problem. The most important component of U.S. growth is productivity. To put it in schoolbook terms, if Americans find new ways to make more widgets in less time, that translates into higher wages. Such productivity gains do occur in housing. But larger gains are usually to be had elsewhere: Silicon Valley, for example. Yet those tax incentives suck private funds into the less-efficient housing industry.

According to Shlaes, the emotional security homeowners derive from staying within the domicile serves as the final challenge. She wrote:

Phelps points to a final subtle challenge to the American economy — the psychic weight we put on houses. Houses comfort, but they also stupefy. After Sept. 11, many citizens discarded travel plans and retreated into their homes for comfort. The Bush administration’s talk of the “homeland” also suggests a premium on security, not risk.

Hurricane Katrina exacerbated the national homebody tendency — at the end of the summer of 2006, around the anniversary of the New Orleans disaster, Home Depot Inc. even began marketing a storm-safe room from DuPont Co.

Housebound, Americans are becoming “less nimble,” Phelps says. Unsold homes prevent families from moving. The deeper challenge is that they are so attached to their houses that they don’t even want to move when they can sell. This stuck-in-the-mud attitude too closely resembles that of Europeans.

The Family Staycation

Source:

“America’s Obsession With Housing Hobbles Growth: Amity Shlaes”
Amity Shlaes
Bloomberg, August 20, 2008

America The Dutiful

Hope everyone had a wonderful holiday weekend. The weather was beautiful out here in the Windy City— especially for fireworks. I’m surrounded by pyromaniacs in my neighborhood, so I spent the evening of the Fourth on my balcony taking in a cigar and watching various home-grown fireworks displays. No casualties, as far as I know, but I’m still coughing up gunpowder. Even though I’m tied down with several projects at the moment, the next day I managed to squeeze in a barbecue out in the suburbs. Overall, it was an enjoyable weekend.

While I always appreciate the celebratory aspect of Independence Day, every year I also make it a point to remember those who made tremendous sacrifices for our country. Too numerous to mention, from Founding Father to Unknown Soldier, I, for one, am eternally grateful to you. Their deeds helped lay the foundation for this country, and we, the present-day caretakers of this great nation, must not let them down.

This weekend, I happened to come across an article in Time by Nathan Thornburg that talked about the rebuilding of Ground Zero in New York City. If we are to compare the progress being made at the World Trade Center site to our ability to manage this country, especially when it comes to economic challenges, well— we’re big trouble. Thornburg wrote:

Rebuilding ground zero was going to be a great show of American defiance, a Knute Rockne speech to the nation. Seven years on, though, this grand statement is barely a stammer. In an unsparing new progress report, the site’s landlord admitted that every part of the project is over budget and behind schedule. It will take several months just to map out a new timeline.

The 16-acre site is a tangle of more than 100 contractors and subcontractors answering to 19 public agencies—a sorry pageant of feuding bureaucrats, shady contractors, litigious developers and overzealous regulators. Even 9/11 advocacy groups share the blame, halting work over smallish details about how best to honor the victims. Few are honored by this impasse of competing agendas.

Nobody is arguing that the rebuilding effort–which will add as much Class-A office space as exists in all of downtown Atlanta–is simple. But lower Manhattan is in danger of becoming a metaphor for America’s sluggish response to our most pressing economic challenges. A recent U.S. Chamber of Commerce report shows a litany of problems: an overloaded rail infrastructure that needs new tracks, signals, tunnels and bridges. Most ports need dredging; almost half of all canal locks are obsolete. While China is spending nearly 9% of its gdp on infrastructure, Americans lose $9 billion a year in productivity from flight delays alone.

It is, at heart, about competitiveness. As the U.S.’s largest construction project limps along, China has built the equivalent of several World Trade Center sites in its furious run-up to the Olympics. While conscript labor and forced relocations aren’t the American way, the U.S. can’t be pleased about being lapped by a developing nation. The global economy rewards countries with the concentration and focus to build quickly and solidly. Bits and bytes are important, but so are steel and mortar. It’s not too late for ground zero to be a showcase for American engineering, efficiency and ingenuity. Anything less risks sending exactly the wrong message.

Ground Zero, June, 2008

Source:

“Nation Building.”
Nathan Thornburg
Time, July 3, 2008

Greenspan On Recession, Stagflation, And Rescuing Homeowners

This morning, former Federal Reserve Chairman Alan Greenspan appeared on the ABC program “This Week” and talked with host George Stephanopoulos about the risks of recession and stagflation, and what could be done, if anything, to prevent more homeowners from losing their residences.

On the probability of an economic recession in the United States:

Well, that the probabilities of a recession have moved up to close to 50 percent — whether it’s above or below is really extraordinarily difficult to tell. I think that’s correct.

On the prospects for stagflation in the U.S.:

Well, I’m most concerned about it… and the evidence is clearly there in rising export prices coming out of China. It’s coming out — it’s showing up in a slowed rate of productivity growth in the United States and elsewhere, and we are beginning to get not stagflation, but the early symptoms of it.

The former head of the Federal Reserve also discussed the current housing crisis in the United States, the problems associated with subprime and other classes of mortgages, and foreclosures:

Greenspan: There are going to be significant losses [on Subprime and Alt-A mortgages]. And there are loss ranges, now — the minimum, now, is $200 billion. But it’s easy, by some calculations, to get to $400 billion.

Stephanopoulos: The political world is now looking at the immediate pain. And Senator Clinton looks — has called for a freeze on foreclosures. Senator Edwards called for a rescue fund to be set up by the government for people who are facing these kind of foreclosures. What do you think about those ideas?

Greenspan: It’s important to help those people without affecting the mortgage rates and without affecting the structure of markets. Cash [from the government] is available and we should use that in larger amounts.

… It’s far less damaging to the economy to create a short term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it’ll drag this process out indefinitely.

Stephanopoulos: But by infusing cash, it sounds like you agree, then, with former Treasury secretary Larry Summers, who says that, right now, given this crisis, there has to be a bias toward activism.

Greenspan: It depends what you mean by activism. If you mean doing something that works, absolutely. If you mean doing something just for the sake of perceptions, that’s very costly. I don’t know if [infusing cash] would work, but it would certainly help people — it would help their incomes; it would help their personal state, without affecting the structure of the way markets are behaving and the way adjustment process is going on. It’s very critical that this thing reach a selling climax — if I may put it in other words, exhaust itself. It’s only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.

The Financial Times (UK) noted afterwards that Alan Greenspan’s remarks about supporting the use of public cash to help struggling U.S. homeowners would likely “fuel growing political pressure for a more radical response to the housing crisis.”

Is A Republican President Really Better For The Economy?

In the December 11 article “Economists Say Recession Risk Is Climbing,” the Wall Street Journal talked about some of the findings from its latest survey of economists. When asked which presidential candidate would be best for the economy, only half of the 52 economists participating in the survey responded. The Journal reported that 35% of respondents chose Rudolph Giuliani, 19% chose John McCain, and 15% picked Mitt Romney as the candidate who would be best for the U.S. economy. Hillary Clinton was picked by 8% of economists participating in the poll, while 4% chose John Edwards. Ron Paul, Michael Bloomberg, and Alan Greenspan each got a write-in vote. Alan Greenspan?

I’m not surprised that the survey results showed economists felt a Republican White House would be best for the U.S. economy. I’ve always heard that the economy performs better under a Republican president. Even when I was an undergraduate student at the University of Illinois at Urbana-Champaign in the early nineties, some of my classmates said that it was a shame that President Clinton and the Democrats were reaping the benefits of economic policies instituted by President George H.W. Bush’s administration. So tonight, I’m going to explore the claim that Republican administrations are “best” for the U.S. economy.

I call to your attention a study done in December 2006 by Elliott Parker, Ph.D., who is a Professor of Economics at the University of Nevada-Reno. Using data from the U.S. Department of Commerce’s Bureau of Economic Analysis, Dr. Parker first compared the economic performance of Republican and Democratic presidencies from 1929 through the end of 2005. He found that the Real GDP Growth Rate (annual average) was 1.9% for Republican administrations and 5.1% for Democratic administrations during this time. Real GDP Growth Rate Per Capita was .7% for the Republicans and 3.8% for the Democrats. However, the professor pointed out that the years comprising the Great Depression and WWII should probably be excluded from the comparison. So economic performance from 1949 (end of Truman administration) to 2005 was compared, which showed Real GDP Growth Rate (annual average) under Republican administrations now stood at 2.9% and Democratic administrations at 4.2%. Real GDP Growth Rate Per Capita was 1.7% for the Republicans and 2.9% for the Democrats. These results prompted Dr. Parker to conclude that “the economy has grown significantly faster under Democratic administrations, and more than twice as fast in per-capita terms.”

The University of Nevada-Reno economics professor also uncovered the following while conducting the economic comparison between Republican and Democratic presidential administrations from 1949 to 2005:
• Unemployment Rate- Republicans 6.0%, Democrats 5.2%
• Change In Unemployment Rate- Republicans +0.3%, Democrats -0.4%
• Growth of Multifactor Productivity- Republicans 0.9%, Democrats 1.7%
• Corporate Profits (share of GDP)- Republicans 8.8%, Democrats 10.2%
• Real Value of Dow Jones Index- Republicans 4.3%, Democrats 5.4%
(in logarithmic growth rates)- Republicans 2.8%, Democrats 4.4%
• Real Weekly Earnings- Republicans 0.3%, Democrats 1.0%
• CPI Inflation Rate- Republicans 3.8%, Democrats 3.8%

Regarding the question of statistical significance, Parker noted:

The differences in growth, unemployment, and the corporate profit share are all statistically significant, and support the argument that the economy may actually perform better under Democrats. The differences in weekly earnings, stock market growth, inflation, and multifactor productivity all favor the Democrats as well, but these differences are not statistically significant.

Addressing the claim heard back in my college days, Dr. Parker also tried to account for a lag effect. He said, “It is a reasonable argument that economic performance early in a new administration is likely to be the result of policies followed by the prior administration.” Therefore, he tested whether lagging the effect of the administration on growth might support the argument that the economy actually performed better under Republicans. The professor found that even with up to four years of lagged effects, there was no evidence that the economy performed better under Republicans.

Dr. Parker drew the following conclusions regarding the claim that Republican presidencies are “best” for the U.S. economy:

But we can reasonably conclude that these government statistics provide evidence that directly contradicts the argument that the economy does better on average under Republican administrations. With lagged effects and other causes considered, the difference may be insignificant, but the economy may actually perform worse under Republicans.

NOTE: For more on this topic, see September 10, 2008, post, “Are Democrats Or Republicans Better For The U.S. Economy?”

Real Wages Stagnating In Goldilocks Economy

Self-interested parties like to claim that the U.S. economy has been healthy these past few years- not too hot, not too cold. In addition, we’ve been told that wages for American workers increased during this time as a reflection of productivity gains in the Goldilocks economy. However, my own observations (and research) tell of a different story. On Monday, the non-partisan Economic Policy Institute issued a report showing that after rising in the second half of the 1990s, most American workers’ real wages have stagnated in the 2000s- especially since 2003. The term real wages refers to wages that have been adjusted for inflation, in contrast to nominal wages or unadjusted wages. While productivity jumped almost 20% since 2000, the real median hourly wage of workers rose just 3% over the same period. Since 2003, productivity has risen only 5%, while the median hourly wage has fallen 1.1%. The Washington, DC-based think-tank says that, “Most workers have relatively little to show in terms of real wage and income gains over this recovery.”

And what does the future have in store? The Institute had this to say:

More downward pressure on wage growth is likely. The recent slowing of productivity growth and rising unemployment are likely to place further pressure on most workers’ real wages in the near to medium terms.

So next time someone tells you that wages in the American workplace have been rising, you’ll know they’re not talking about real wages. And regarding the Goldilocks economy? In the version I was told as a child, Goldilocks was eventually eaten by the three bears.

Cartoon courtesy of www.gaspirtz.com