Search This Blog

Wednesday, July 27, 2011

Why buy a new house?

Two posts in one day!  Oh Frabjas day, calloo callay!

This is something I find very frustrating.  I moved around a lot as a kid.  I lived in 5 homes before I moved out.  My parents never once considered buying a "new" house.  A key economic marker, at least to the guys at Planetmoney, is the number of New Housing Sales, or New Housing Starts.  That is, the number of new houses being sold, or the number of new housing being built.  Neither makes much sense to me.

1)  The population continues to grow.  So we'll always need new houses.  But families die off, move around, houses burn, etc.  My wife's hypotheses is that this number will never be the same, and that excess inventory should be burnt to the ground.  I don't think that extremely, but what I do think is that, this number can't be all that exciting to watch.  The population doesn't change that much.  And yet, look at it.  It's a friggin' roller coaster:

So something must be screwy.  And, it is.  The housing market was a bubble.  People were buying homes and flipping them.  Homes were no longer a long term investment, and so speculators bought several of them, thinking to sell after making minor alterations.  People in my own family owned multiple homes, not because they could afford to, but because they thought they could sell before the bubble burst.

So maybe we should stop looking at this number.  The number should be relative stable, and should only match the need for housing beyond what is already on the market, which is considerable.  Manhattan is really the only place in the country that needs new housing, and frankly, we're a bit over-saturated as well.  Dozens of new luxury apartments opened up in the lowskirts of Harlem and Morningside Heights.  And most of those units are still empty!  Brooklyn had it much worse, and still has huge deserted tracks of useless luxury buildings.

2)  Not thinking about the economy at all, but frankly, there is only one reason to build new house.  Ecobuilding.  My wife's parents are examplar's of this, with the help of a graduate student in architecture, they actually constructed a house built specifically to have a low carbon output, no air conditioner, no gas heating.  It's still a work in progress, but it will be pretty amazing. 

Other than that?  No.  Not once in those 5 moves did my parents even consider building a home.  For one, in an old Connecticut community of bluebloods, development was anathema.  To be sure, they were there, we lived in one for several years.  But I can think of only three developments in the entirety of my town.  When people bought houses, they bought houses in established neighborhoods.

Everything falls apart.  I can see renovations on existing homes.  I can even see demolishing old homes because of filth, contamination, hoarding, damage, unsafe conditions.  But how often is that the case?  How often is it that a home is simply beyond the pale?  I can't think i  t's that often.  Apartment buildings in New York are rarely demolished.  In fact, it's almost impossible to extract some tenants.  There's a building on my corner that has been all but derelict save for one or two filled apartments.  Derelict for at least five years!  That's expensive real estate.  Worth millions and millions of dollars.  And someone is using it to the last drop. 

Bottomline.  I don't think new housing starts or sales should be an economic performance measure.  I think the only reasonable explanation for the chart above, is the proliferation of housing bubbles.

The Debt Ceiling

I've been busy, a dead relative, a case going to trial, and not a lot of time to write.

There isn't much about the Debt Ceiling fracas that I can say that you haven't already heard on NPR, CNN, MSNBC, Michael Lind, Andrew Leonard, Alex Parene, Elliot Spitzer, you name it.

But my loyal readers want a position on the debt ceiling--as if they didn't already know.  My away message on my email has been this for days, as Krugman wrote:  "As Mike Konczal of the Roosevelt Institute puts it, the G.O.P. has, in effect, come around with baseball bats and declared, “Nice economy you have here. A real shame if something happened to it.”"

Is the government bloated?  Quite probably, do efficiencies and cuts need to be made?  Of course they do, they always do.  But on the cusp of recession?  Are you out of your mind?  Even if the government were employing a legion of loafers, all of those people are at least 'working.' They're taking that money home and spending between 90-96% of it.  That's a 1.66 yield on each dollar spent.  Cut the loafers in good times, not in bad.

This has always been, and will always be, one more opportunity to kill the welfare state.  It has nothing to do with the deficit, interest rates have been at historical lows and up until now (there has been absolutely no movement in the market for U.S. treasuries, until it becomes more and more likely that we may in fact actually default on our obligations.

The question is, how far are they willing to take it?  No one likes to admit it, but even Republicans are hooked on the welfare state.  The government backstops their companies, guarantees their banks, runs courts and arbitration panels that make decisions that effect billions of dollars every day.  And those are just the capitalist arguments.  Most Republicans are middle class values voters (I say most, merely because the rich and the super rich are simply too few to count as a majority in any group) and most receive welfare benefits of some kind, whether its medicare, social security, unemployment checks, or other transfer payments.  When the treasury can't service the debt, the government is going to have to decide, who do we pay first?  I take it as a matter of course that non-essential government employees will get furloughed immediately.  But even the non-essential become essential over time.  Case in point, in Minnesota the government has been shut down for weeks now.  All well and good, but now the bars can't restock because the government agency responsible for alcohol licensing is closed indefinitely.

But this is a risk that the Republicans seem to be willing to take.  And this brinksmanship is so extreme that I'm beginning to wonder if they know something I don't.  This seems like bad news for them.  Of course, its a lose-lose for us.  A president who is unable or unwilling to fight for basic entitlements that the entire country benefits from and many of whom are desperate for, gains absolutely nothing from either party by compromising.  He may stave off a worldwide economic calamity, but he'll lose his party and his identity in so doing.  If the Republican presidential field weren't such a sad sack of rejects I'd be more mortified than I am.  Mitt will NEVER get elected, Pawlenty has already been lamed, Gingrich was out before he began, Bachman is the most promising of all, and she's bat shit crazy.

One last point, the Republithugs keep saying its ok if we get past the second of August, because we'll pay the bondholders first.  I agree, we'll have to, world peace depends on it.  But what happens when unemployment, social security, and medicare payments disappear?  What happens when entire divisions of the government cease to work?  That will be terrible for the anti-entitlement party.  But it will be worse for all of us.

Tuesday, July 5, 2011

Conservative v. Liberal: Economic Jujitsu

Ok, nothing substantively new in this post:  just thoughts.

The two parties offer radically different prescriptions for economic recovery, both with short-term and long-term ramifications.

The Liberal Plan:

Short Term:  Massive government spending, in infrastructure, education and transfer payments, keeps the money flowing directly to those who are spending it.  Every dollar spent by the government equals $1.8 dollars spent cumulatively, as each party down the lines spends 80% of the income received.  This is called an economic stabilizer, and economists from both parties agree them to be absolutely necessary.  For any economy to grow, it needs to find stability first. 

Long Term:  Investments in education pay off, as companies can hire more and better educated employees, who fill the structural employment gap noted by Libertarian economists as the reason why unemployment is currently so high.  Liberal economists would argue that with the massive government outlay listed above, unemployment is already reduced, and educated employees contribute to accelerated GDP growth in the long term.  Massive investment in infrastructure means employees can go where the work is, means companies can ship their goods at cheaper rates, means the costs of production generally go down, which makes demand leap up, etc. etc.  Continued transfer payments draw off as the unemployment rate lowers, as the baby boomer's continue to die off, and Generation Y finally goes to work.  Deficit gets reduced, GDP goes up, QED.

The Conservative Plan

Short Term:  By lowering tax rates, and generally drawing down restrictions and regulations on companies, the costs of production are lowered.  By lowering the costs of production, demand is allowed to rise with cheaper prices, and the economy slowly recovers.  Though there is much short term suffering as lowering costs reduce the social safety net, general prosperity will increase in the future, and until then, everyone who isn't making buck just needs to try harder. 

Long Term:  The lower tax rates, don't lead to new business.  Companies have simply taken the money and run, or continue to wait for positive signs in the economy to invest.  However, as the food lines are around the block, home ownership drops, and a dearth of government services mounts, the existing infrastructure crumbles, and business relocate to richer states, or completely different companies where the infrastructre remains solid, it is abundantly clear that this is NOT the time to invest. 

Moreover, tax savings begin to vanish, as the momentary surge in short term demand leveled off within the first year, and companies continue to lay off workers, because people just aren't buying.  Worse, now that transfer payments have cut off abruptly, the nation's baby-boomer's are dying in abandoned ghettos in Florida and New Mexico. 

The unemployed are forced to resort to crime, since there are no jobs.  Fortunately, conservatives are big fans of prisons, and the prison population swells.  The prison population ends up consuming all of the government's excess resources, until they're privatized, at which point, the inmates are neglected, fed based on work output, worked to death, and/or are genetically modified, and generally lose all the rights inherent to being human. 

Let's not forget that the conservatives have cut off all regulatory bodies, or worse, corrupted them to the point where they become industry revolving doors (I know, I know) and the public suffers from a rash of quack remedies which are untested at best, and dangerous at worse.  The only government services receiving any funding at all, are the police, who are advised to use extreme force wherever necessary. 

Financial regulatory bodies like the SEC have completely ceased to exist which means that the only check on the financial system are the public accountants who are paid by the companies themselves to ensure compliance.  Needless to say, compliance fades as businesses, desperate to derive some profits, switch to cheaper and less experienced accountants, who say everything is rosy. 

Everything is rosy, until someone notices the Emperor doesn't have any clothes, at which point the stock market begins to buck and writhe like a rollercoaster, and investors begin to unload U.S. stocks in a panic. The big banks close their doors and layoff hundreds of thousand employees, and as the government has completely defaulted on its debt, no one is willing to lend the money to bail out the government except China, Japan or Germany to bail out the failing U.S. economy.  China, which has been working like hell for self-sufficency tells the U.S. to get bent, takes the loss, because let's face it, they really could care less if their peasants starve or riot.  Japan which has its own crisis to deal with, takes a small portion of the debt, but not nearly enough, further losing their shirts in the decade after the worst decade in the history of the World.  The highly zenophobic population of the U.S. turns to Germany as its last savior...and on and on and on...