Kevin Drum

How Far Does Housing Have to Fall?

| Wed Sep. 8, 2010 1:58 PM EDT

How much further do housing prices have to fall? David Leonhardt frames the debate this way:

Do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it’s more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?

If you believe housing resembles a luxury good, then you’ll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren’t terribly overvalued. If housing is a staple, though, prices will rise more slowly — with general inflation, as food tends to.

....Perhaps most persuasive is a statistic that [Robert] Shiller sent me when I asked him about this debate. It shows that the share of consumer spending — and, by extension, of income — devoted to housing has not fallen over time....As societies get richer, they do spend more and more on housing.

Some of this spending, Mr. Shiller notes, comes in the form of bigger, more expensive houses. These houses don’t do anything to lift the value of a smaller, older house — which is what matters to individual homeowners. But McMansions are not the only factor.

I think I'm mostly on Leonhardt's side — though with a caveat. My view when the housing bubble started to burst was that prices wouldn't revert to their historical mean. They'd drop to a point about 10-20% higher. I figured this was due to a few factors: incomes may have risen slowly over the past few decades, but they have risen, and that means people can afford more house. At the same time, higher incomes also mean that people can afford to spend a bigger piece of their income on housing. In the past, conventional wisdom said not to spend more than 25% of your income on housing, but that's since gone up to 30% or even 35%. And finally, there really are some built-up areas (mostly on the coasts) where there's simply a shortage of land to build more houses, and that's going to push up average prices. Bottom line: housing prices still have a way to fall, but probably only about 15-20% more, not the 25-30% it would take to get back to historical levels.

But then there's the caveat: it's possible that this is right in the long term but not in the short term. In the short term, it's possible that the housing bubble will overcorrect, partly for purely psychological reasons and partly because the economy is in such poor shape. So I'm not sure what I think anymore. If you held a gun to my head, I'd say that nationwide prices will end up settling at around 110-120 on the Case-Shiller scale, not 100. But you'd probably have to keep that gun to my head to make me put my money where my mouth is.

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The Mitch Daniels Plan for Even More Unemployment

| Wed Sep. 8, 2010 1:06 PM EDT

Ezra Klein says he was impressed with Mitch Daniels' op-ed today in the Wall Street Journal that spelled out his plan for economic prosperity. So I hopped over to take a look. I guess I'm — well, let's say I'm a wee bit less impressed.

Here's the nickel version: reduce taxes, rescind TARP spending, cut federal pay 10% across the board, and slash regulations. Bold! Innovative! Daniels' plan calls for reducing payroll taxes, which I guess is an improvement over jumping on the usual Republican bandwagon for tax cuts on the rich, but there's not much else good that can be said for it. It's the same old same old.

Which is OK, I guess. After all, my plan is the same old same old too: I don't care all that much how we do it, but we need higher deficits right now, not lower ones. Daniels' plan simply has no stimulative power at all, even in theory. And no matter how often he repeats the same stale bromides, it's simply not true that we're going the way of Greece; it's not true the federal spending hasn't worked; it's not true that healthcare reform is holding back job creation; and it's not true that businesses are afraid to spend because of uncertainty over new regulations. What's holding back the economy is that lots of people are out of work, lots more people are cutting back in order to pay down debt, and the result is sluggish consumer demand. We need more money in circulation, not less. Daniels is selling the same tired economic snake oil as every other Republican in the country, and it won't work. This isn't worth getting impressed over.

UPDATE: Jon Chait piles on:

Wow, look at that! You have a plan! With numbers! Hooray for you!....Sure, you rely on magical Constitutional thinking and empirically false analysis of federal pay. And your savings only make it 9% of the way to your stated goal. And the four revenue offsets you promised is really only three offsets plus one unrelated ideological hobbyhorse. But it was a good try. Look at Sarah Palin and Newt Gingrich over there — they fell down after only a few yards! You should really think about running for president.

UPDATE 2: Ezra goes back to the well to defend Daniels here. I think maybe I'm even less impressed now. Let's review the bidding:

  1. Daniels clearly and vigorously says in his op-ed that our growing national debt is a disaster and that his proposed tax holiday will be offset twice over by his spending cuts.
  2. Jon quite clearly demonstrates that Daniels' spending cuts don't even come within a light year of offsetting his tax cuts.
  3. Ezra says that's the whole point: Daniels repeatedly uses the word "emergency" in his piece, and as an old OMB hand that has a very specific meaning. It means his tax cuts don't have to be offset.

So which is it? Ezra says he's making calls to figure that out. But come on. Daniels knows perfectly well how to use the English language. He's either deliberately fibbing about the size of his spending cuts so that his Journal readers won't realize he's proposing a gigantic piece of deficit-driven stimulus, or else he's deliberately trying to trick budget wonks with his use of the word "emergency" and doesn't actually have the slightest intention of backing any proposal that isn't deficit neutral.

This is simple stuff. If Daniels means one or the other, he can say it easily enough. Until he clears this up in plain English, I remain unimpressed.

UPDATE 3: Daniels responds here. He says his proposal includes only about $400 billion in tax cuts and he thinks he's identified about $400 billion in spending cuts. And if it doesn't work out that way, he'd scale back the payroll tax holiday.

So this is a deficit-neutral tax cut of medium size. It would almost certainly have no noticeable effect on the economy at all.

Obama and Climate Change

| Wed Sep. 8, 2010 12:26 PM EDT

Joe Romm says Barack Obama blew it by prioritizing healthcare over climate change. Matt Yglesias comments:

I’m sympathetic to this view. My main reason for voting for Barack Obama over Hillary Clinton in the 2008 Democratic primaries, was the difference on Iraq. But an important secondary reason for me was that the leading health care wonks I knew — and especially Ezra Klein and Jon Cohn — kept disparaging Obama’s commitment to health care reform. Unlike Hillary Clinton, they told me, he didn’t seem that invested in this issue. He seemed to think it was perhaps of secondary importance and that climate and energy mattered more. Well that sounded to me like Obama had the right priorities! And I know it sounded correct to Nancy Pelosi as well.

But obviously what wound up happening was that the White House prioritized health care over energy and Pelosi certainly didn’t stand in the President’s way.

Really? Is that what healthcare wonks were saying back in the day? It sure never seemed that way to me. In fact, on the Hillary front, I can remember two sides to the whole story. Side #1 suggested that healthcare was Hillary's life work and she wouldn't rest until she had passed a healthcare reform bill. But side #2 suggested that her experience in 1994 had scarred her so badly that she was unlikely to risk her presidency on healthcare at all. I always figured #1 was the better argument, but it was hardly a slam dunk. And on the Obama front, his dedication to healthcare reform, even though he initially opposed the individual mandate beloved of wonks everywhere, always seemed pretty strong.

So....I don't know about this. I'm just guessing here, but I'd say that Obama probably prioritized healthcare for a couple of reasons. First, it seemed like a better political win. It promised goodies for voters, after all, whereas climate change legislation promised nothing except higher electricity bills. Second, I'll bet that after a few months in office his legislative folks concluded that a decent climate change bill could never pass the Senate. And I think they were right. My take on things is that even a half-ass climate bill tops out at 55 votes, and even that's only with a ton of arm twisting. Climate change never really had a chance.

Would things have been different if Obama had campaigned on a serious climate platform? Maybe. But I doubt it, and I'm more sympathetic to the power of the bully pulpit than most political science types. In the end, though, Obama never tried. As I said in 2008:

To paraphrase an old military saying, the opposition gets a vote too. And the opposition's message to a public already tired of high gasoline prices is going to be simple: Liberals want to raise energy prices. Your energy prices.

And make no mistake. Barack Obama's cap-and-trade plan to reduce carbon emissions may be technically one of the best we've ever seen, but it will raise energy prices. That's the whole point. So once the public understands that there's more to Obama's plan than green-collar jobs and serried ranks of windmills on the Great Plains, they're going to have second thoughts. And those congressional majorities, who face election in another couple of years, are going to have second thoughts too.

And guess what? Obama's congressional majority did indeed have second thoughts, especially since the green-collar jobs and serried ranks of windmills had already largely been funded in the stimulus bill. The high-water mark for public opinion on climate change was in 2005 or so, and we've been losing ground ever since. Until we get it back, Congress is going to continue to do nothing.

Cell Phones and the End of History

| Wed Sep. 8, 2010 12:00 PM EDT

From Stephen Randall, on the demise of landlines and the growth of cell phones:

Bluetooth is ugly and frustrating; no wonder everyone likes it. Bluetooth alone has done more to destroy civil discourse than cable news and talk radio put together.

I'm convinced that the reason so many teens and 20-somethings hate talking on the phone is because they grew up with cell phones. The amount of mental energy it takes to plow through an average cell phone call is deceptively high, and if I'd grown up with cell phones I'd probably hate talking on them too. Doing it more than a couple of times a day is enough to give anyone chronic fatigue syndrome.

But the telephone industry has been conspiring for years to ruin landline phones too. In the old days, phones just worked. Modern phones, however, are dizzyingly variable in delivering simple sound quality.1 I'm not sure why. Do they use 10-cent microphones instead of the high-quality 20-cent microphones that would work better? Do the electronics simply not work well? Is it all down to cordless technology not being able to deliver 64 kbps of bandwidth reliably even at a distance of 20 feet? Or what? Why is the communication industry apparently so intent on making communication so unpleasant?

1And don't get me started on headsets. I've tried at least half a dozen over the years and none of them work well. Is there some reason why AT&T operators in 1940 had headsets that delivered crystal clear voice quality but there's no combination of consumer grade phone and headset in 2010 that doesn't make you sound like you're talking from the bottom of a well deep in one of al-Qaeda's caves in Tora Bora?

The Revenge of the Insurance Industry

| Wed Sep. 8, 2010 1:21 AM EDT

The Wall Street Journal reports that health insurers are planning to dramatically raise premiums to pay for extra benefits required by the healthcare reform bill passed earlier this year. Is this legit? Or are insurers just using ACA as a handy excuse to jack up rates? My guess is that a couple of sentences in the Journal piece tell the story:

The rate increases largely apply to policies for individuals and small businesses and don't include people covered by a big employer or Medicare.

....Democrats front-loaded the legislation with early provisions they hoped would boost public support. Those include letting children stay on their parents' insurance policies until age 26, eliminating co-payments for preventive care and barring insurers from denying policies to children with pre-existing conditions, plus the elimination of the coverage caps. Weeks before the election, insurance companies began telling state regulators it is those very provisions that are forcing them to increase their rates.

Hmmm. Don't those provisions apply to all plans, not just individual and small-business policies? So why are insurers boosting rates only on the latter? I'm sure Aetna and Blue Cross have some extremely complicated and plausible sounding reasons for this, but I'd take them with a grain of salt. More likely they're raising rates for the same reason they've been raising rates for the past few years, and it has almost nothing to do with ACA. Caveat emptor.

The Circular Firing Squad

| Tue Sep. 7, 2010 7:33 PM EDT

A couple of days ago on This Week, Tony Blair made the fairly unoriginal observation that lefties tend to engage in circular firing squads a lot:

"I love my own politics and progressives and all the rest of it," Blair told ABC's Christiane Amanpour in an unaired portion of his This Week interview from Sunday. "But if we have a weakness as a class, when the right get after us and attack our progressive leaders, instead of defending them we tend to say, 'Yeah, well, really we've got a lot of complaints about them, too.'"

Blair said that the tendency of the left to pile on rather than defend its own leaders can leave their politicians alone to face the right wing attack machine, which Blair says is merciless. "It doesn't matter how well intentioned you think you are," Blair said of the right. "They're going to go for you completely."

"And then the interesting thing is, the progressives say, 'Hey you're not being progressive enough! Why don't you do more for us?'" Blair added. "And so you can end up in quite an isolated position if you're not careful."

Jon Chait comments:

The general political dynamic consists of Republicans decrying socialism, liberals denouncing a sell-out, and moderate deficit hawks clucking that the deficit hawkery doesn't go far enough....As I've stated many times, the overwhelming cause of the Democrats' perils is that they held overstretched majorities while taking control of government at the outset of a massive economic crisis. But the inability of the left to handle majority status is an important contributor to the dilemma. It's not surprising that Democrats would lose independent voters, or that Republicans would be wildly enthusiastic, when they control the government and push agressive reforms during an economic calamity. But the sheer sullenness of the liberal base does seem to be avoidable and puzzling.

I guess I find this less puzzling than Jon since I bounce around on this a lot myself. Yes: a big stimulus, healthcare reform, financial reform, and a drawdown in Iraq are pretty significant accomplishments by any measure, and especially significant accomplishments given the political atmosphere. But: there's also the escalation in Afghanistan, a weak record on civil liberties, the reappointment of Ben Bernanke, aggressively centrist choices for the Supreme Court, and a seeming unwillingness to take on Republican intransigence in a really full-throated way. There's just no way that a committed liberal isn't going to be a little discouraged by all this stuff.

At the same time, contra Blair, it's not as if this is solely a liberal problem. Conservatives were unhappy with Reagan in 1982, unhappy with Bush Sr. in 1990, and unhappy with Bush Jr. in 2006. (And unhappy with a succession of Tory leaders in Britain over the past couple of decades.) Maybe it's just the way things go, and political bases are never happy.

But....I dunno. It sure feels a little different with Obama. Other presidents at least seem to have always paid lip service to their base, and that's better than nothing. Obama seems allergic to the whole concept. My mind tells me why (the liberal base is too small and Democrats have to rely heavily on leaners and centrists to win), but my gut still has a hard time with it. Long story short: I don't think the liberal base is too stupid to understand that liberal politicians have to compromise a lot, it's just that they'd just like to feel more certain that liberal politicians really would like to do more and are compromising because they don't have any choice. It doesn't seem like so much to ask.

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Chart of the Day: Follow the Bouncing Ball

| Tue Sep. 7, 2010 6:47 PM EDT

Last week's generic congressional poll from Gallup got a lot of attention because it suggested Republicans were ahead by a landslide with only two months until election day. And this week? Suddenly the parties are tied again.

I don't think there's any real lesson here except that these numbers can be pretty volatile. Maybe last week was an outlier. Maybe this week is. Who knows? But it ain't over til the fat lady sings.

The Case For More Tax Brackets

| Tue Sep. 7, 2010 2:29 PM EDT

Annie Lowrey continues her campaign for a higher tax bracket or two:

For the past 20 years, the top income tax bracket has started around $370,000, and top marginal tax rate has stayed between 35 and 39.6 percent. But since the mid-1990s, the richest have gotten richer, earning a higher and higher share of all income while paying the same income tax rate as more moderate-income workers.

Indeed they have. I recommend some class warfare here, except that the classes in question will be the well-off, the rich, and the super rich. How about if we reduce the top rate on the well-off (say, those making between $200,000 and $370,000), raise it on the rich (between $370,000 and $1 million), and raise it a bunch on the super rich (over $1 million). If you really want to get ambitious, you could even add yet another bracket that kicks in around, say, $5 million.

Why not? As Annie points out, we used to have more brackets. There's no law that says everyone over $370,000 should pay the exact same rate, and the supply-side theory that the super rich will lose all their ambition if their tax rates go up is based on essentially no evidence at all. What's more, the rich and the super rich (not the merely well off) are the ones who have really done well over the past couple of decades, so higher brackets for them make sense. The winners here would be all the lawyers and doctors and accountants in the well-off bracket. The losers would be hedge fund managers, Fortune 500 CEOs, and Goldman Sachs traders in the rich and super-rich brackets.

Which ones would the Republican Party support? We'll make this all revenue neutral, of course, so they don't have to break the blood oath that Grover Norquist has forced them all to sign. Want to take a guess?

Obama's FDR Moment

| Tue Sep. 7, 2010 1:24 PM EDT

President Obama's Labor Day speech in Milwaukee is getting a lot of attention, partly for his claim that "powerful interests" in Washington "talk about me like a dog," which I admit I can't completely parse. Then there's this (starting around 44:00):

These are the folks whose policies helped devastate our middle class. They drove our economy into a ditch. And we got in there and put on our boots and we pushed and we shoved. And we were sweating and these guys were standing, watching us and sipping on a Slurpee. (Laughter.) And they were pointing at us saying, how come you’re not pushing harder, how come you’re not pushing faster? And then when we finally got the car up -- and it’s got a few dings and a few dents, it’s got some mud on it, we’re going to have to do some work on it -- they point to everybody and say, look what these guys did to your car. (Laughter.) After we got it out of the ditch! And then they got the nerve to ask for the keys back! (Laughter and applause.) I don’t want to give them the keys back. They don’t know how to drive. (Applause.)

I mean, I want everything to think about it here. When you want to go forward in your car, what do you do?


THE PRESIDENT: You put it in D. They’re going to pop it in reverse. They’d have those special interests riding shotgun, then they’d hit the gas and we’d be right back in the ditch. (Laughter.)

Sure, he's delivered some of these lines before. And they're sort of corny. But I like it anyway. It sounds very FDR-esque to me: a full-throated attack on the opposition party and on corporate interests, but delivered with wit and humor. More like this, please.

Basel III Rumor Mill Update

| Tue Sep. 7, 2010 12:09 PM EDT

Really, you just can't blog enough about the Basel Accords on international banking capital standards, can you? As you recall, we're now up to Basel III (numbered like popes and Super Bowls), what with Basel II not looking so healthy after the 2008 financial crisis, and the question is whether Basel III is really going to tighten things up on the bank capital front. The answer, apparently is yes: Die Zeit reports not only that the basic ("Tier 1") capital requirement is going up from 4% to 6%, but a couple of other requirements are being layered on top of that as well. This is good news, but the problem is that defining capital is legendarily tricky, and banks will probably respond to the new rules by including all manner of dodgy-looking assets as part of their Tier 1 capital. Felix Salmon takes it from there:

Ah, you say, but can’t they just be clever with definitions, including all manner of dodgy-looking assets as part of their Tier 1 capital? Well, yes. So there’s a parallel set of requirements for what they’re calling Core Tier 1: essentially, pure equity. That has a minimum of 5%, plus a conservation buffer of 2.5%, plus a countercyclical capital buffer of another 2.5%.

This would be a genuine improvement if it survives the final negotiation process, which will include furious lobbying from the international financial community. And it's almost exactly what I was arguing in favor of a few months ago. So cross your fingers and hope that the gnomes of Basel stick to their guns and make it happen. If we can agree on a simpler definition of capital (and, hopefully, a simpler definition of assets to go along with it), the banking system will be safer than it was before. Not perfect, but better. And right now, better is good news indeed.