The Liberal Order

The Housing Market in Raleigh, NC

Every realtor with whom I've discussed this argues that since Raleigh did not experience a substantial increase in housing prices between 2000 and today, any decrease in housing prices will be relatively small. Wrong!

Areas like Washington, DC, Los Angeles, CA, and Long Island, NY, all of which experienced large price increases and subsequent decreases in housing prices, have growth controls preventing builders from expanding inventory sufficient to meet the increased demand. Whether it's limited open space or zoning restrictions that limit new development, housing inventory could not keep pace with the rapid increase in demand. This caused housing prices to increase substantially between 2000 and 2007. When demand declined in 2007, more rapidly than it rose the previous eight years, prices fell precipitously.

In areas like Raleigh, where open space is plentiful and the opportunity cost of land is relatively inexpensive, builders responded to the increase in demand by building and building and building. After demand fell significantly . . . well, prices did not fall that much, at least yet. But it's coming. 

Housing inventory, especially new homes, has increased significantly over the past two years in the Raleigh area and continues to do so. Prices have a long way to fall to eliminate this excess inventory. For those familiar with their microeconomic supply and demand models, DC, LA, and NY all have very inelastic supply curve while in Raleigh it's very elastic.

Exacerbating the problem is that a large part of the increase in demand experienced in the Raleigh market over the previous six or seven years was driven by people relocating here from the DC metro, LA, and NY city areas, among others, all areas that experienced large housing price increases between 2000 and 2007. These people purchased small homes in those areas for, say, $250k in 1998 and then sold them in 2005 for, say, $600k. Flush with cash from the sale of these homes, they came to Raleigh and demanded big homes. Builders here responded by building big. 

Now that the bubble has popped and people are no longer moving here with that kind of cash, demand for these big homes stopped, yet builders continued to build. The oversupply is heavily concentrated in the $500k+ market. The cascading effect is soon to come as builders begin unloading these larger and more expensive homes.

After this happens, housing prices will be pushed further downward at all price points, throwing more homeowners underwater and subsequently into foreclosure. This will drive housing prices down even further.

Update: Edited for clarity.

An Open Letter to Jon Stewart

Dear Jon,

      I've been watching you since the mid-80s when you hosted Short Attention Span Theater with Patty Rosborough. You were funny.

      You are a comedian hosting a news parody show. It's funny and it works when you stick to your strength - being funny. You fail, however, when you take yourself seriously and step out of your comedic character to publicly berate your guests for their views. 

Reading the New York Times or the Progressive or The New Republic does not make you an expert on some topic. In fact, given your narrow political views and your refusal to familiarize yourself with alternative points of view, it makes you an ideologue. It must be that Liz Winstead influence. (Remember, she's not that funny, she's just bitter, much like you're becoming.)

Stick to what you do best, which is comedy, lest you end up like Bill Maher, an idiot crank who takes himself seriously and ends up hosting a show with a parade of morons for his half-witted mindless audience. Have you paid attention to your audience lately?

Be brave, be bold, but most of all, be funny. Nobody can take you seriously, or nobody will take you, seriously. 

Yours truly,

Me

What About the Opportunity Cost of Time?

As the saying goes, recycling is for those who fail to understand the opportunity cost of time. It seems this is the case with student trays and college cafeterias.

Scores of colleges and universities across the country are shelving the trays in hopes of conserving water, cutting food waste, softening the ambience and saving money.

Yes, but as we know, TANSTAAFL:

But while the environmental benefits are real, going trayless is not a panacea. At Skidmore, the all-you-can-eat format and multiple food stations, featuringvegetarian, Italian and classic comfort foods, encourage students to forage, taking a bit of this and a little of that. But this system also leads to congestion as diners return to the lines for seconds (or fourths).
“That’s one of the disadvantages,” said Sam Pope, a junior from Worcester, Mass., referring to an absence of trays. “You have to keep getting up and getting more food. It increases dining hall time because there’s so much traffic.”

And how about that food waste?

As part of her senior honors thesis, Sarah Whateley, an environmental studies major, conducted a research project to demonstrate how much food was still wasted in the dining hall. She asked students to scrape their leftovers into plastic bins over two days, yielding 330 pounds of food on a Sunday and 403 pounds on a Monday. The food services staff then illustrated that quantity by stacking the equivalent weight in boxes of rice in the entrance of the dining hall.
“People were really surprised,” she said. “Entire sandwiches were being thrown out, and a whole slice of pizza.”
Still, Miss Whateley believes there is less waste without the trays. “Most people don’t want to get up to get more food,” she said. “The only thing that changes is that you take less and you actually eat what you want rather than what you see.”

So, if cutting costs is the goal, this might not be working. But then again, how important is the attempt to cut costs when you have this?

For the most part, when students returned in the fall, they were so dazzled by the transformation of the cafeteria that they hardly noticed the missing trays. The renovated dining hall has three slate fireplaces and a half-dozen food stations, including a do-it-yourself griddle for eggs. Three of the chefs are graduates of the Culinary Institute of America, and all the pasta, granola and baked goods are made on site.

Mankiw vs. Murphy

First, let me acknowledge my utmost respect for Greg Mankiw, not only professionally, but as an individual. I’ve been reading Professor Mankiw’s work as published and blog since its inception and have never observed him treat others with disrespect, including those with whom he disagrees. In the public forum of his blog, Mankiw comes across as humble and is not derisive to others simply because he disagrees with contrary ideas and opinions. As the old saying goes, he’s both a gentleman and a scholar.

Second, let me berate Bob Murphy for the snarky, condescending attitude toward Mankiw in his critique of Mankiw’s recent New York Times op-ed. Bob and I were colleagues a few years back and I came to know him as an intelligent and lucid debater. Never did I observe him treating others disrespectfully. I know Bob is above this and believe his arguments would have been better received had he not taken on the condescending tone in his critique.

That being said, Mankiw fails to address Murphy’s argument. The gist of what Murphy is arguing is not the classical paradigm purporting perfectly efficient markets and instantaneous market clearing. Instead, Murphy is arguing that 1) the FED policies of the past, which Mankiw professes will bring the U.S. economy out of the current recession, were at least partly responsible for getting us into this mess in the first place; 2) that markets need to recover from the sectoral imbalances caused (at least largely) by FED policies in addition to other poor investment decisions; 3) that this recovery is effectuated through changes in prices and interest rates; 4) that markets do this naturally and manipulation of either prices or interest rates by the FED or the government undermine this process; and 5) that the Keynesian AD theory fails to understand and/or appreciate the complex nature of markets. Consequently, Mankiw's prescription is not only bad policy, it is according to Murphy, bad economics.

The way I read Murphy is not that markets rapidly clear, but that the sectoral imbalances take time to run their course. This will result in prices and interest rates declining adjusting over some unspecified time, enabling markets to subsequently recover. This recovery process will result in resources being diverted away from sectors of the economy that are contracting and toward sectors that are expanding. Which is which is not known to anybody, but changes in relative prices, including interest rates, signal to where these resources should be diverted. This change entails complex processes that take time to work through and attempts to manipulate the process lead to unintended consequences, the most recent being the FED's response to the events of 2001, which resulted in a housing boom and bust, the cause of our current recession.

The Mankiw neo-Keynesian approach is to view all macro disequilibria as an aggregate demand issue that can be simply rectified by changes in nominal money. Prices and wages and interest rates do not fall rapidly enough to equilibrate markets, a process that can be jump started by increasing nominal balances. Any uncertainty or sectoral shifts are secondary to the problem of returning the macroeconomy to its full-employment equilibrium. Yes, market corrections take time, but during this time some people are unemployed, which creates great hardship, at least for those people, and probably many others. We can therefore circumvent this painful process by returning aggregate demand to its full-employment level through these changes in nominal money.

If this is the case, however, maybe we shouldn’t even be teaching economics at all. If the problem is only that unemployment causes hardship in the short run and that as a consequence we need to minimize this hardship, it’s a simple solution: put people to work digging holes or using scarce resources to build airports few people use. If, however, the problem is a misallocation of scarce resources, and, given the complex nature of markets, nobody has the necessary information (nor, necessarily, the proper incentives) to correct this misallocation, then maybe (likely) the neo-Keynesian (as well as Keynesian and monetarist) solution(s) are likely to exacerbate the problem, certainly in the long run.

A Simple Thought

Is teaching creationism as part of a biology curriculum akin to teaching astrology as part of a physics curriculum?

Debunking Protectionist Myths

Don Boudreaux challenges those who promote protecting American manufacturers and their workers from less expensive imports from abroad. 

A few things bear repeating over and over:

First, countries do not trade with each other. Individuals residing in different countries trade with each other voluntarily and the governments in those countries often put up roadblocks to prevent this voluntary exchange in order to benefit politically connected special interests.

Second, trade is not a giveaway; it is trade. If I purchase a Toyota Landcruiser (produced in Japan) I am indeed not purchasing an automobile produced by GM, which offers me less value per dollar. (Since I want more bang for my buck, why are my interests sacrificed for the interests of GM or their affiliated unions?) But these dollars that Toyota now holds are used to purchase software, pharmaceuticals, airplanes, chemicals, etc. all produced by American firms. If you stop the flow of dollars to Japan, you simultaneously stop the flow of dollars (and yen) from Japan. This means that a job is not saved by prohibiting my voluntary purchase of a Toyota Landcruiser. The dollars acquired by Toyota are used to purchase goods and services produced in this country, or to invest in American productivity, or to lend to U.S. residents to purchase goods and services, or to the government to build productive assets like roads, or to  squander away. (Hint: That last possibility is not a reason to halt voluntary trade between people residing in different countries. It is a problem independent of trade that itself needs correcting.)

Third, even if you could demonstrate and prove that in the short run, some workers are made worse off as a result of me purchasing a Toyota Landcruiser from the Japanese manufacturer, we must consider the long run. How would our lives look today if we protected jobs from the past, jobs lost due to both technological advances and to free international trade? Is there really anyone who would argue anything other than much poorer?

Fourth, it's easy to make the case for protectionism, but as Bastiat aptly notes, it takes an hour to explain and understand the fallacy of protectionism. But let me make a few arguments.

If a genie's lamp washed ashore and a beautiful blond in a persian outfit  offered me anything I wanted at any time just by blinking her eyes and, poof, she manufactures it out of thin air, are we made worse off? If I wanted to build a home and Jeannie blinks her eyes and poof, all the lumber I need is right there, is society worse off because I'm not buying the wood from the logger and the mill and the lumber yard? All those jobs lost, are we worse off? Is it really a zero sum game in that my gains come at the expense of others? No. Those workers are now freed up to produce other things we would like but are not presently able to obtain due to a shortage of labor relative to human wants.

But even if you said it was a problem, what about this. Imagine that the first commercial airplanes were made with completely automatic cockpits? There was never a need for a pilot - the planes simply flew by remote control guided by a computer. And suppose that this technology evolved and today the same pilotless aircraft persisted, offering safer flights at lower cost. Would we today bemoan the loss of pilots' jobs? Would the protectionists argue that we should destroy the technology in order to "save" jobs? (BTW - The technology to do this already exists.) There is no difference if a machine does a job, or a foreigner in a foreign land, or even if a Jeannie does it. The only thing that matters is consumption and we get more goods at lower costs. 

All of the above apply to competition for goods and services produced by domestic labor. I don't get the goods for free, (though if there exists a real Jeannie in another country I'd like to meet her), but the ability to acquire goods and services at lower cost exists and I'm made better off purchasing them. Labor that would have produced it in this country, much like those who would have been pilots but are not given the pilotless commercial aircraft, are freed up to produce other, more highly valued, goods and services, including goods and services we had no idea we even desired.

Your (Or Actually Your Kids') Tax Dollars At Work

I guess this is what Paul Krugman argues is good stimulus spending. Notice that the airport was build and funded under Republican leadership of the House, Senate, and Presidency.

Luke Froeb links to this CNN version of the story, which includes a piece about a completely unmanned air traffic control center.

SC Woman Sees Image of Jesus In Her Cheese Toast

Oh no! Not again.

Update: Here's the image and story from the past. But this piece of toast contains an "image" of the Virgin Mary, not Jesus.

Imagine

Suppose the McDonalds restaurant down the street from you had violent thugs standing outside waiting to harass you. They can be violent at times, but for the most part they demean you as you enter the restaurant and as you're eating your meal. Obviously the restaurant would be out of business if it didn't take care of the problem and assure its customers their safety and a pleasurable experience. 

It's too bad our government schools aren't run more like McDonalds.

A Timely Cartoon from the Past