A trillion bucks is a lot of money. The costs of shutting down the economy are larger. California's GDP is essentially zero at the moment. US GDP was about $22 trillion per year before the virus hit, almost $2 trillion per month.
Shutting everything down and staying home for a few weeks is a sledgehammer. OK, our leaders have to hit a virus with a sledgehammer when they have nothing else up their sleeve. But it cannot last. Businesses will close, people will lose jobs, the economy will not be there to start up again.
Needed fast: a plan to open up the economy again in a virus-safe way. Every business should be (and likely is) working hard to figure out how to operate in a virus-safe way. Federal state and local government need to be working 24 hours a day during the next few weeks to promulgate virus-safe practices. Not because they are particularly good at it, but because they are the ones shutting things down, and their permission is needed to reopen, fully or partly. People also will want the confidence to know that businesses they patronize are compliant. You've got two weeks -- figure out what combination of personal distancing, self-isolation, testing, cleaning, etc. will allow each kind of business to reopen, at least partially.
The option to force everyone to stay home and close all "non-essential" business for three or six months is simply not viable, at least for a disease something short of the bubonic plague. The option to wait two or three weeks and then start thinking about what it takes to allow, say, the local dry cleaner to reopen, which will take another month or so, is simply not viable.
Take two weeks. Find out who has it and who doesn't. Test test test. Isolate, put out the embers. And reopen. Slowly, cautiously, partly. But reopen.
I have kept public health and economics separate, but they no longer are. Shutting down the economy is a public health measure. The costs of this measure are astronomical -- at least a trillion dollars per month. As yourself what the government could have done with a trillion dollars to nip this in the bud. Please, next time, be ready. Massive testing, identifying cases, contact tracing, isolating areas with known cases, early and hard might have cost a lot of money and disruption. Even 100 billion dollars now looks like a very small sledgehammer.
Friday, March 20, 2020
Thursday, March 19, 2020
Implementing Federal lending
The central problem now is how the Federal government can lend money to businesses that need it -- without a budget blowout. I proposed letting people borrow from the IRS which has a pretty good mechanism for getting repaid. Martin Lowy has a more detailed suggestion along these lines:
- Credit for any business that needs it, so long as the business’s history suggests that it will have the capacity to repay, given enough time.
- A simplified underwriting system based solely on filed tax returns. Bank-style underwriting is a cumbersome process that would impede the flow of credit and would tend to make it subjective and political—and therefore a subject of criticism all along the way.
- A repayment period of something like 36 months that begins a few months after the crisis has passed. A business cannot begin to repay until it has had some time to get back on its feet.
- Use of the income tax mechanism to enforce repayment so that no new bureaucracy is required and so that the system will be seen as fair, rather than based on subjective criteria.
- A mechanism to assure that recipients of these loans will continue to use them in part to continue to pay their employees.
The devil is always in the details. Just what rules are overstressed IRS employees supposed to implement to judge if a "business’s history suggests that it will have the capacity to repay, given enough time?" Just what is the final "mechanism?" Once again, that we have entered this crisis so unprepared means it is unlikely a measure like this can be rolled out in the needed days, let alone weeks or months. Still, it starts to flesh out a good idea -- or at least a better idea than enormous stimulus checks and bailouts all around.
Update: Lowy responds by email:
I (Lowry) welcome additional questions about the details.
Update: Lowy responds by email:
- Who may get credit? Loans would be extended to any business that filed an application, but limited in amount by the business’s historical sales and profits as reported to the IRS.
- In what amount? The size of advances would be a percentage of the revenue and taxable income of the applicant. The lesser of one twenty-fourth of gross sales or one-sixth of taxable income. No subjective criteria.
- Period for repayment. Depends on the length of the crisis. If the crisis/credit advances last 4 months or less, 36-months; longer crisis, longer period for repayment.
- Application process. Electronic only. Simple facts. Promise to repay. TIN. Account to send advances to. Amount requested per month. All based on last annual tax filing.
- Employee compensation certification. Certify that in each pay period after receiving a credit, applicant would pay every employee who was on the payroll on February 15, 2020 at least 75% of the average amount paid to that employee in the last four pay periods before that date.
- Interest rates. 5% per annum, except if the business was borrowing at a higher rate—then that higher rate.
- Collateral. None.
I (Lowry) welcome additional questions about the details.
Groundhog Day virus plan.
Via Marginal Revolution, a very clever idea from Scott Ellison:
The central problem is really a coordination problem. A owes B money. A is shut down so can't pay. B understands and would be happy to wait until the crisis is over. But B owes C money, so can't wait. And on down the line it goes. It's like daylight savings time. We could individually decide to move things an hour earlier in spring, but mostly A wants to show up at work when B will be there. There are lots of coordination problems like this, and a useful function of government is to solve them.
But the economy is not completely shut down. Food and medicine need to keep going, and need to be paid! If we literally stop all payments, shutting down the ATM machines, credit card machines, and salaries of the 80% or so who will keep their jobs, we create an insane mess. So some clocks shut down and some others don't and now you have a mess on your hands.
So while this is a useful metaphor and guide to a central problem now, it's not a practical solution. An economy is much like a human. We can sleep, but we can't freeze the clock, shut down totally and restart again.
I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed.I mentioned "the debt clock keeps ticking when the economy shuts down" as the central problem, but didn't go as far as to advocate this simple solution. (Which I still don't, read on.)
The central problem is really a coordination problem. A owes B money. A is shut down so can't pay. B understands and would be happy to wait until the crisis is over. But B owes C money, so can't wait. And on down the line it goes. It's like daylight savings time. We could individually decide to move things an hour earlier in spring, but mostly A wants to show up at work when B will be there. There are lots of coordination problems like this, and a useful function of government is to solve them.
But the economy is not completely shut down. Food and medicine need to keep going, and need to be paid! If we literally stop all payments, shutting down the ATM machines, credit card machines, and salaries of the 80% or so who will keep their jobs, we create an insane mess. So some clocks shut down and some others don't and now you have a mess on your hands.
So while this is a useful metaphor and guide to a central problem now, it's not a practical solution. An economy is much like a human. We can sleep, but we can't freeze the clock, shut down totally and restart again.
Wednesday, March 18, 2020
WSJ oped on virus policy
Why is the market going nuts? What should policy do? I put some of my recent thoughts in a Wall Street Journal Op-ed, here. As usual I can't post the whole thing for 30 days, but if you're clever you can find it.
This is not a "demand" recession needing "stimulus." The economic policy challenge is to allow the economy to shut down, but make sure it doesn't die in the process. The problem is -- once again -- debt.
We are headed to the second huge creditor bailout. When it's over, we need to start taking seriously that if you're too big to fail, you're too big to borrow. Airlines, this means you.
The Oped summarizes many ideas in condensed form. To see more, use the "pandemic" label below, or this link
This is not a "demand" recession needing "stimulus." The economic policy challenge is to allow the economy to shut down, but make sure it doesn't die in the process. The problem is -- once again -- debt.
Had everyone kept a few months of cash around, things would be fine. But many did not. Now we are seeing the beginnings of a scramble for cash, as people and businesses try to sell assets or borrow. But who is buying? And who is lending? Banks can’t make new loans to companies and people with no income.If there is a wave of firing and bankruptcy,
A pandemic can turn quickly to a financial crash and a long recession, not a V-shaped pause. That’s the scenario spooking markets, and it should spook all of us.
What to do? Clearly the central goal of policy should be to keep businesses alive so they are ready to turn back on again.The main focus of economic policy should be
Lending is better than transfers. Since loans must be paid back, larger amounts can go where needed. ...
Forbearance is important. Banks and creditors should not immediately shut down a nonpayer. But they have to be allowed to forbear by their regulators, their own creditors, and their own fiduciary responsibility, and to borrow or pass forbearance up the line....
Rather than give each of us $1,000, allow us to borrow a fraction of last year’s income from the Internal Revenue Service and repay when we file our taxes. That provides more money to those who need it, and helps those even with large debts not to default. Allow penalty-free withdrawals from retirement accounts. Social-program rules must be stretched. If people have to lose a job to get help, we tempt the employer to needlessly fire them, and they and the employer are not ready to start up again fast.This is all really hard. Economists blogging from home are full of good and creative ideas. But changing rules for who banks can lend to, to create pandemic exemptions, is much much harder than writing checks. It would be awfully nice if anyone in government had put the slightest thought into this ahead of time.
We are headed to the second huge creditor bailout. When it's over, we need to start taking seriously that if you're too big to fail, you're too big to borrow. Airlines, this means you.
The Oped summarizes many ideas in condensed form. To see more, use the "pandemic" label below, or this link
Tuesday, March 17, 2020
Airline bailouts and capital regulation
The airlines are about to get a huge bailout. Why are they in such trouble? Well, yes, nobody is flying so their revenues are cratering. But why not just stop flying for a while? The answer is, they have loads and loads of debt.
U.S. Airlines Spent 96% of Free Cash Flow on Buybacks writes Brandon Kochkodin on Bloomberg
If airlines were financed by equity, they would have a natural shock absorber. They could just shut down, stop paying dividends, and then wake up on the other side. But they have debts to pay, and if they don't pay creditors will take them to bankruptcy court, seize assets, break them up and there won't be airlines when the virus is over.
Enter the federal bailout, as always really a bailout of the creditors.
Does this all sound like banks 2008? It is.
If we are going to bail out airlines then there needs to be subsequent capital regulation. Once bailed out you cannot finance yourself on a mountain of debt next time around. Issue equity, retain earnings.
Everyone is watching. If debts lead to bailouts with no consequences, there will be more debts and more bailouts. Yes, even now we have to watch moral hazard. We are setting precedents for the next larger pandemic.
The only reason the economy is in trouble is that not enough people and businesses kept cash reserves or plans to weather a shut down. If the ants bail out the grasshoppers without consequences, we will enter the next crisis with nothing but grasshoppers.
If there is going to be a bailout this consideration makes it ever more important that the government lends money, or invests, and is paid back first before any current creditors or stockholders. Don't just send a check.
U.S. Airlines Spent 96% of Free Cash Flow on Buybacks writes Brandon Kochkodin on Bloomberg
American Airlines Group Inc...led the pack, with negative cumulative free cash flow during the decade while it repurchased more than $12.5 billion of its shares. United Airlines Holdings Inc. used 80% of its free cash flow on buybacks, while the S&P 500 Index as a whole allocated about 50% for the purpose. As the industry reels under the weight of the coronavirus outbreak corporate leaders are seeking federal assistance to ease the burden.Let's be clear. It is a myth that buybacks are bad because they reduce investment. And free cash flow isn't a very interesting divisor. But buybacks do have a downside: they reduce equity and increase debt. Fine if you and the creditors are willing to take a bath in bad times. Not good if debt means taxpayers have to bail out in bad times. Too big to fail is spreading like a virus.
If airlines were financed by equity, they would have a natural shock absorber. They could just shut down, stop paying dividends, and then wake up on the other side. But they have debts to pay, and if they don't pay creditors will take them to bankruptcy court, seize assets, break them up and there won't be airlines when the virus is over.
Enter the federal bailout, as always really a bailout of the creditors.
Does this all sound like banks 2008? It is.
If we are going to bail out airlines then there needs to be subsequent capital regulation. Once bailed out you cannot finance yourself on a mountain of debt next time around. Issue equity, retain earnings.
Everyone is watching. If debts lead to bailouts with no consequences, there will be more debts and more bailouts. Yes, even now we have to watch moral hazard. We are setting precedents for the next larger pandemic.
The only reason the economy is in trouble is that not enough people and businesses kept cash reserves or plans to weather a shut down. If the ants bail out the grasshoppers without consequences, we will enter the next crisis with nothing but grasshoppers.
If there is going to be a bailout this consideration makes it ever more important that the government lends money, or invests, and is paid back first before any current creditors or stockholders. Don't just send a check.
Unemployment insurance pandemic conundrum
Should the government make unemployment insurance more generous and easier to get in the pandemic recession? Well, yes, but it's not ideal, and a good point on which to ponder the difference between a pandemic recession and a conventional recession.
To get unemployment insurance, you have to actually lose a job (in most cases) and you are supposed to be looking for a new job. In the pandemic recession, lots of people will be temporarily furloughed - -think airline pilots or flight attendants. But assuming, and helping to ensure, that the economy comes roaring back, we don't want airlines to fire pilots and flight attendants, and we don't want them walking around looking for new jobs at other shut down businesses. It would be much harder for airlines to get going again; the employees lose health insurance (!) and other benefits, and people out looking for work are spreading viruses around.
Yes, there are some open jobs now. Amazon is looking for workers, as much activity moves online. Anyone with medical skills should be helping at hospitals. And face-mask and sanitizer companies are hiring. But this cannot make up for the large number of Americans who will be sitting on the sidelines for a few months.
So, we want unemployment and other benefits for people who aren't technically unemployed, but whose companies are shut down for the virus and can't afford to keep paying them.
Why don't we always have that, you might ask? Well, our social programs have a lot of rules and for good reasons -- to manage the inevitable unintended consequences and moral hazards of normal times and normal recessions. Government paying salary and health benefits of furloughed workers would give companies a big incentive to routinely furlough employees instead of giving them vacations. Around the world, unemployment insurance and many other benefits are coupled with job search or training requirements, to avoid the massive overuse experienced before those requirements were put in place. But we don't want them now.
So our problem is that a pandemic shutdown requires a different set of detailed micro rules and regulations about who get what when. Good old Keynesian stimulus and standard automatic stabilizers are completely inappropriate. Incentives matter, now as much as ever, not just cash.
Here we economists are very clever. Marginal revolution links to many clever ideas to get us through the crisis, new programs and new rules and new ways of getting money to where it is needed. I've blogged a few dozen clever ideas too.
But it is nearly impossible to ask bureaucracies to make things up on the fly in a crisis, and invent an implement new rules in a matter of weeks, even if politicians could agree what those programs should look like. This is the lesson of Graham Allison's Essence of Decision masterpiece on the Cuban missile crisis. (If you're looking for good self-isolation reading this is a great one. It also shows how important it is to have a President who can make cool decisions in a crisis, when all his or her advisers are screaming nonsense. The many pandemic books are also great reading. We have been here many times before and it's always the same chaos.) That is the lesson of 2001, when we discovered that half the emergency responders didn't have the other half's phone numbers. That's why when this is over, we need a serious pandemic economic plan, one that gets practiced and refined, and not just another big report that gets shelved and forgotten.
At the cost of repetition, there will be other pandemics.
To get unemployment insurance, you have to actually lose a job (in most cases) and you are supposed to be looking for a new job. In the pandemic recession, lots of people will be temporarily furloughed - -think airline pilots or flight attendants. But assuming, and helping to ensure, that the economy comes roaring back, we don't want airlines to fire pilots and flight attendants, and we don't want them walking around looking for new jobs at other shut down businesses. It would be much harder for airlines to get going again; the employees lose health insurance (!) and other benefits, and people out looking for work are spreading viruses around.
Yes, there are some open jobs now. Amazon is looking for workers, as much activity moves online. Anyone with medical skills should be helping at hospitals. And face-mask and sanitizer companies are hiring. But this cannot make up for the large number of Americans who will be sitting on the sidelines for a few months.
So, we want unemployment and other benefits for people who aren't technically unemployed, but whose companies are shut down for the virus and can't afford to keep paying them.
Why don't we always have that, you might ask? Well, our social programs have a lot of rules and for good reasons -- to manage the inevitable unintended consequences and moral hazards of normal times and normal recessions. Government paying salary and health benefits of furloughed workers would give companies a big incentive to routinely furlough employees instead of giving them vacations. Around the world, unemployment insurance and many other benefits are coupled with job search or training requirements, to avoid the massive overuse experienced before those requirements were put in place. But we don't want them now.
So our problem is that a pandemic shutdown requires a different set of detailed micro rules and regulations about who get what when. Good old Keynesian stimulus and standard automatic stabilizers are completely inappropriate. Incentives matter, now as much as ever, not just cash.
Here we economists are very clever. Marginal revolution links to many clever ideas to get us through the crisis, new programs and new rules and new ways of getting money to where it is needed. I've blogged a few dozen clever ideas too.
But it is nearly impossible to ask bureaucracies to make things up on the fly in a crisis, and invent an implement new rules in a matter of weeks, even if politicians could agree what those programs should look like. This is the lesson of Graham Allison's Essence of Decision masterpiece on the Cuban missile crisis. (If you're looking for good self-isolation reading this is a great one. It also shows how important it is to have a President who can make cool decisions in a crisis, when all his or her advisers are screaming nonsense. The many pandemic books are also great reading. We have been here many times before and it's always the same chaos.) That is the lesson of 2001, when we discovered that half the emergency responders didn't have the other half's phone numbers. That's why when this is over, we need a serious pandemic economic plan, one that gets practiced and refined, and not just another big report that gets shelved and forgotten.
At the cost of repetition, there will be other pandemics.
Monetary policy and coronavirus -- French edition
Vox-Fi put up an edited version of my monetary policy and coronavirus post, in French, La politique monétaire en réponse au coronavirus
Practice your French. Read the whole thing here
Un collègue et moi avons discuté de la question suivante : la Fed (Federal Reserve, la banque centrale des Etats-Unis) devrait-elle baisser ses taux d’intérêt en réponse au coronavirus?
Plus généralement, supposons qu’une pandémie devienne grave et que, par choix ou par décret, une grande partie de l’économie s’arrête pendant quelques semaines ou mois. Qu’est-ce que la Fed, ou toute autre politique économique devrait faire à ce sujet?...
Practice your French. Read the whole thing here
Friday, March 13, 2020
The market to the rescue
I've been worried that businesses can't get loans to keep going during a virus shut down. Everyone seems to be jumping to the idea that we need rivers of Federal money. Maybe I should have more faith in the free (well, this is banking, but somewhat free) market.
(Thanks to an anonymous correspondent for the tip.)
pandemic and protection
A pandemic can have useful side effects, one being that it makes us see the costs of protection.
Next up: how do you stop people from hoarding ex ante? Answer, commit that there will not be the usual price controls and rationing ex post.
Thanks to a correspondent for the link.
Thursday, March 12, 2020
Area 45 pandemic podcast
For you podcast fans, here is a longer podcast with Hoover's Bill Whalen on economics and the pandemic. It clarifies some of my evolving thoughts -- more lending, less bailout.
The pandemic is quickly threatening to turn in to a financial crisis. I'm brooding on that for upcoming posts.
If you're not worried yet, read here
https://medium.com/@tomaspueyo/coronavirus-act-today-or-people-will-die-f4d3d9cd99ca
From pandemic to financial crisis?
Yes, the stock market is jumping around, but Treasury markets are also going a bit nuts. And the NY Fed is pulling out the Bazookas:
A pandemic should be one grand stay-cation. (Writing here about the economy, and those of us who do not get sick. It is of course combined with a health care disaster, which I don't write about for the simple reason that I'm not a pandemic health policy expert.) The economy shuts down as it seems to do over Christmas - New Years, or Europe in August, and then starts right back up again. Except people and businesses make sure they have cash to pay bills over the vacation. If the US follows Italy to a national shutdown, businesses start to fail, banks get in trouble, here we go. I think these are signs of a flight to cash starting up.
As far as I know the "stress tests" never asked "what are you going to do in a pandemic."
Informed commentary from market participants is especially welcome. Thanks to correspondents for both of these links, which I do not regularly follow.
Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020. Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule. The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.In English, you can get cash quick by parking your treasury securities to the Fed. And the Fed is getting ready for huge amounts.
These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.If I read this right, we're looking at a cut to 0.25% very soon.
A pandemic should be one grand stay-cation. (Writing here about the economy, and those of us who do not get sick. It is of course combined with a health care disaster, which I don't write about for the simple reason that I'm not a pandemic health policy expert.) The economy shuts down as it seems to do over Christmas - New Years, or Europe in August, and then starts right back up again. Except people and businesses make sure they have cash to pay bills over the vacation. If the US follows Italy to a national shutdown, businesses start to fail, banks get in trouble, here we go. I think these are signs of a flight to cash starting up.
As far as I know the "stress tests" never asked "what are you going to do in a pandemic."
Informed commentary from market participants is especially welcome. Thanks to correspondents for both of these links, which I do not regularly follow.
Wednesday, March 11, 2020
Bugs
Do we have your attention yet? I ran across the Cambridge Centre for the Study of Existential Risk, which thinks about the tail events that could destroy civilization.
Here is a nice thought to keep you up at night, given how unprepared our governments have revealed themselves to be. It's an old thought, but perhaps one our governments will start to take more seriously:
Here is a nice thought to keep you up at night, given how unprepared our governments have revealed themselves to be. It's an old thought, but perhaps one our governments will start to take more seriously:
there is a trade-off in natural pandemics between transmissibility and lethality – if a pathogen kills its host too quickly, the host can’t infect many other people. But due to biotechnological advances, it may soon be possible to engineer pathogens to be more infectious, more fatal, and to have a delayed onset – and so be far more dangerous.
New breakthroughs like the targeted genome editing tool CRISPR-Cas9 are increasing our capabilities; and the cost of DNA sequencing/synthesis and the hurdle of expertise are rapidly decreasing. ...
An engineered pandemic could escape from a lab, or it could be deliberately used as a weapon. During the 20th century several countries had state-run bioweapons programmes, and we know of several non-state groups that have attempted to acquire bioweapons.
Almost singlehandedly, one postdoc was recently able to recreate horsepox (similar to smallpox, which killed 300m in the 20th Century) from scratch in only six months. Capabilities that were once only in the hands of governments will soon be within reach of non-state actors.
A novel pathogen, designed to be deadlier than anything in nature, could severely affect the entire world. As Lord Rees has said “The global village will have its village idiots, and they'll have global range”.Now think about a terrorist group or a country developing both the virus and the vaccine, which would take a year to develop otherwise. It's like a James Bond movie, except entirely realistic.
Rajan on Piketty
People often ask what I think of Piketty. I have to admit: I haven't read his books (or pretended to). Life is short, and it's 1,000 pages.
But Raghu Rajan has, and writes a splendid and well written review at the FT. Bottom line, the choir is singing:
But Raghu Rajan has, and writes a splendid and well written review at the FT. Bottom line, the choir is singing:
as a call for nations to enact massive redistribution programmes to reduce inequality, this latest work will persuade few outside his devoted following.What's wrong?
Piketty describes social systems through the ages — such as slavery, feudalism, colonialism and caste — collectively as “inequality regimes”. No surprises, then, about what he thinks is their key attribute. In each case, he uses historical sources to map the distribution of incomes and wealth and show how the situation today parallels those earlier abhorrent episodes. The obvious implication: if we are not disturbed by what is going on around us, we should be.If our level of inequality is the same as slavery, feudalism, colonialism, and caste, then we are no better or different. That's an astonishing statement, though common on the left.
Friday, March 6, 2020
Stimulus or stimu-lend?
Jason Furman wants stimulus:
The medicine should fit the disease. Jason's logic seems to be good old aggregate demand -- the answer is the same, only the questions change.
As I think about a pandemic, shutting down the economy is most likely to cause liquidity problems. The key is to keep businesses alive and not force them to formally fire people, so they're ready to start up again. My version put more money in the place where it's really needed, measured by people's willingness to pay it back.
If you believe money doesn't grow on trees, deficits must eventually be repaid, and that money should go where it is needed, this seems like a better idea.
Update: Paul Kupiec advances a similar idea
Congress should pass a simple one-time payment of $1,000 to every adult who is a U.S. citizen or a taxpaying U.S. resident, and $500 to every child who meets the same criteria.Here's a better idea. The IRS should allow anyone to borrow up to $10,000 against future tax payments, with interest. The IRS has an excellent collection mechanism.
The medicine should fit the disease. Jason's logic seems to be good old aggregate demand -- the answer is the same, only the questions change.
As I think about a pandemic, shutting down the economy is most likely to cause liquidity problems. The key is to keep businesses alive and not force them to formally fire people, so they're ready to start up again. My version put more money in the place where it's really needed, measured by people's willingness to pay it back.
If you believe money doesn't grow on trees, deficits must eventually be repaid, and that money should go where it is needed, this seems like a better idea.
Update: Paul Kupiec advances a similar idea
Thursday, March 5, 2020
Politically allocated (aka "affordable") housing
I've long been curious about politically allocated housing. (It's called "affordable," and "below market rate," but why should we let the left make up all the buzzwords?) A free market economist smells a rat of inefficient subsidies, and huge inequality-increasing implicit tax rates.
If it's "below market rate" then ipso facto more people want it than can have it, so it has to be allocated by standing in line, lotteries, and/or extensive qualifications. That means it's going to go to people who have been around a long time, not to newcomers who want to get jobs. Once you get an "affordable" unit, I would figure, getting a better job or a raise is going to cost you rent, or getting kicked out of your apartment. Moving across town to get a better job is out of the question -- there is a long line for those apartments. The "affordable" deals all seem to be worked out on a case by case basis, making it very hard for an economist (or voter) to figure out what's going on.
But that's all suspicion. I have been looking for a comprehensive study of these programs, but haven't found one. (Hint: doing such a study looks like a great idea for our free market think tanks!)
Enter a great anecdote: "How Do You Measure The "Success" Of Affordable Housing?" by Francis Menton, the "Manhattan Contrarian"
Menton scathingly reviews a West View News article, "to guarantee the future you have to buy it," which is actually true taken completely out of context. (Buying an apartment is a great hedge against rent increases,.) He covers the story of the Penn South Houses,
I need to go by on a tourist visit to boondoggles someday.
Menton adds up the subsidies:
Menton gets a very important inefficiency. By subsidizing long-time residents to stay put, we subsidize a very inefficient match of apartment to location.
If it's "below market rate" then ipso facto more people want it than can have it, so it has to be allocated by standing in line, lotteries, and/or extensive qualifications. That means it's going to go to people who have been around a long time, not to newcomers who want to get jobs. Once you get an "affordable" unit, I would figure, getting a better job or a raise is going to cost you rent, or getting kicked out of your apartment. Moving across town to get a better job is out of the question -- there is a long line for those apartments. The "affordable" deals all seem to be worked out on a case by case basis, making it very hard for an economist (or voter) to figure out what's going on.
But that's all suspicion. I have been looking for a comprehensive study of these programs, but haven't found one. (Hint: doing such a study looks like a great idea for our free market think tanks!)
Enter a great anecdote: "How Do You Measure The "Success" Of Affordable Housing?" by Francis Menton, the "Manhattan Contrarian"
Here in Manhattan, it is an article of unshakable religious faith that conjuring “affordable housing” into existence, through some magic recipe of taxpayer subsidies and coercion, is a fundamental responsibility of government.In the Bay Area too.
I called government-coerced “affordable housing” the “most expensive possible way to help the smallest number of people.”A good theme, but he too misses the possibility that it may be the most expensive possible way to hurt a larger number of people, by tying them to a specific income level and apartment.
Menton scathingly reviews a West View News article, "to guarantee the future you have to buy it," which is actually true taken completely out of context. (Buying an apartment is a great hedge against rent increases,.) He covers the story of the Penn South Houses,
This complex of 2,820 units is located between 8th and 9th Avenues, from 23rd to 29th Streets. At its closest point, it is just two blocks, 0.1 mile, from Penn Station, the busiest train station in the country.
I need to go by on a tourist visit to boondoggles someday.
This complex is what we here in New York call a “limited equity co-op.” Back in the 60s when it was built, the sponsor (a labor union) sold the apartments for deeply subsidized prices of about $7500 - $15,000 per unit, depending on the size of the unit. The deal was that when you sold, you had to sell back to the co-op for the exact amount you had bought for — no profiting by selling on the free market. The project also got a deeply-subsidized mortgage (financed by a tax-exempt bond sale by the State), and a total property tax exemption for 40 years....
Today, a benchmark price for a good-size two-bedroom apartment in this neighborhood would be about $2 million. According to the WestView News piece, a recent price for a two-bedroom apartment at this complex was about $150,000, subject to the same deal that when you leave you must sell it back for exactly what you paid. To get one of these apartments, you must go through a waiting list of about 20 - 30 years.20-30 years. Well, so much for the young family who wants to move to NY to get a better job.
Menton adds up the subsidies:
But let’s take a more critical view of what the cost of this Penn South thing really is:
The property tax exemption for this complex is worth at least $10,000 per year per apartment, and up to $20,000 per year for larger apartments. This annual non-cash handout goes entirely to people who by definition are not poor. [Menton added up the costs to live there. You have to be decidedly "middle class"]
Other people who must pay the additional $10,000 or $20,000 tax per year for comparable apartment also must earn cash income to pay that, and then pay tax on the cash income before they pay the property tax. That’s another subsidy of about $4000 - $8000 per year per apartment.
People who sell apartments in the private market must pay capital gains tax on the sale at a rate of about 20% federal and 11% New York State and City. Whatever you might think of the altruism of these people in agreeing to resell without personal profit, they also avoid paying these taxes, that are used to provide government services.
The article linked above reporting on the federally guaranteed mortgage loan estimates the savings to the complex at $3 million per year. That’s another $1000 per year per apartment handout that others don’t get.
Add it all up, and a fair estimate of the cost to taxpayers of this project is around $20,000 per household per year. And what exactly is the superior moral claim to the annual $20K of these people over, say, you? If every “middle-income” household (of which there are around 100 million) in the country is entitled to the $20K, we would be talking about an annual $2 trillion +/-.This is really good -- not all subsidies are on budget!
Menton gets a very important inefficiency. By subsidizing long-time residents to stay put, we subsidize a very inefficient match of apartment to location.
And even that $20,000 per year per household is on the assumption that in an unsubsidized world this site would remain with the same buildings and the same number of apartments. If instead the complex was auctioned to the highest bidder and then put to it’s highest and best use — which probably would be some mix of office buildings, hotels, and high-end condos — the resulting property taxes alone would probably come to at least $50,000 per Penn South apartment, and maybe up to $100,000.Coase rolls over in his grave at many of these deals. How many of these residents would move out in a minute in return for $100,000 per year?
And finally, did I mention that this project is in close walking distance to Penn Station, the busiest train station in the country? The government spends additional billions to run hundreds of trains a day in and out of there, only to find a high percentage of the nearby blocks occupied by buildings that almost no one traveling into the City is going to. So those people need to get off and take the subway, when there could be hotels and office buildings right nearby. Subsidized housing is about the worst possible land use in the immediate proximity of a major transit hub.
Pandemic plan
Graham Allison's wonderful book on the Cuban missile crisis teaches an important lesson: You cannot ask bureaucracies to think on the fly. They can execute plans, but don't ask them to innovate quickly. If, for example, it would be a good idea in a pandemic to allow people to withdraw from retirement accounts, or access sick leave even if they are not sick, don't expect this to happen overnight. Don't even expect customs to figure out that we shouldn't all be touching the same screen when we get off a plane.
That's why we have plans for floods, earthquakes, terrorist attacks, hurricanes and more. And agencies regularly practice these.
I opined in my last blog post a bit of horror that we seem to have no national pandemic plan, and our poor public officials are making it up as they go along. This turns out to be wrong.
It turns out there is a national pandemic plan.
I haven't read it all, but it does not seem to have been widely implmented or practiced, and it's interesting that I am not hearing any of our public officials reference it. It has a lot of recommendations for the private sector that I know my employer never heard of. It also seems silent on economic and financial questions -- how do companies with no sales keep from running out of money.
I welcome comments from people who know this document. Is it, like the executive summary, just an airy wish list that got written and forgotten? Or is this an effective plan widely known in the Federal Bureaucracy.
(Thanks to a correspondent for the link)
That's why we have plans for floods, earthquakes, terrorist attacks, hurricanes and more. And agencies regularly practice these.
I opined in my last blog post a bit of horror that we seem to have no national pandemic plan, and our poor public officials are making it up as they go along. This turns out to be wrong.
It turns out there is a national pandemic plan.
I haven't read it all, but it does not seem to have been widely implmented or practiced, and it's interesting that I am not hearing any of our public officials reference it. It has a lot of recommendations for the private sector that I know my employer never heard of. It also seems silent on economic and financial questions -- how do companies with no sales keep from running out of money.
I welcome comments from people who know this document. Is it, like the executive summary, just an airy wish list that got written and forgotten? Or is this an effective plan widely known in the Federal Bureaucracy.
(Thanks to a correspondent for the link)
Tuesday, March 3, 2020
Growth and Free Soloing Podcast
I did a podcast for The Indicator, a NPR Planet Money podcast, free associating on the free solo blog post. What does free solo illustrate about the process of economic growth? Fun. Cardiff Garcia is a good well-informed interviewer. (Chicago Booth Review also spiffed up the blog post to a more readable essay.)
Corona virus monetary policy
A colleague and I were discussing the question, should the Fed lower interest rates in response to the corona virus?
More generally, suppose a pandemic gets serious and either by choice or by fiat a large swath of the economy is shut down for a few weeks or months. What should the Fed, or other economic policy do about it?
My first instinct was that the Fed should not lower rates. This is a classic supply shock, and there is nothing more demand can do. What’s the point of encouraging more spending if the stores are closed? Even giving people money doesn't do any good if the stores and factories are closed. The first job of a central bank should be to ask “is this a supply shock or a demand shock” and respond to demand shocks, not supply shocks. This is like stoking demand at night or over the weekend.
But supply and demand aren’t so neatly distinguished. Maybe a supply shock creates its own lack of demand. And a pandemic has demand effects too. People hunker up at home and don’t want to go buy a new boat. One job of the central bank is to spy what the natural real interest rate is, and move the nominal rate accordingly so there is no force unsteadying inflation. Well, if the economy shuts down, people don’t want to spend, since the stores are closed, so by definition they save. (Unless income is shut off). People don’t want to borrow (except to roll over) for the same reason. The marginal product of capital is nothing. So that argues for a pretty sharp fall in interest rates.
But as I think about it, the right answer is that this is the wrong question, and aggregate supply and demand is the wrong framework for thinking about it. What happens if the economy shuts down for a few weeks or months, either by choice or by public-health mandate? Shutting down the economy -- and more importantly turning it back on again -- is not like shutting down and turning on a light bulb. It's more like shutting down and restarting a nuclear reactor. You need to do it carefully, and make sure the parts survive the shutdown intact.
I can see huge financial problems. The store and factory may shut down, but the clock still ticks. Businesses must still pay debts, with nothing coming in. They likely have to pay wages -- otherwise, what will people do to buy food? People have to make mortgage payments and rent, likely with no income coming in. Left alone, there could be a huge wave of bankruptcies, insolvencies, or just plan inability to pay the bills. A modestly long economic shutdown, left alone, could be a financial catastrophe. When the economy starts up again, if half the businesses have gone bankrupt in the meantime there is a lot less ready to start.
More generally, suppose a pandemic gets serious and either by choice or by fiat a large swath of the economy is shut down for a few weeks or months. What should the Fed, or other economic policy do about it?
My first instinct was that the Fed should not lower rates. This is a classic supply shock, and there is nothing more demand can do. What’s the point of encouraging more spending if the stores are closed? Even giving people money doesn't do any good if the stores and factories are closed. The first job of a central bank should be to ask “is this a supply shock or a demand shock” and respond to demand shocks, not supply shocks. This is like stoking demand at night or over the weekend.
But supply and demand aren’t so neatly distinguished. Maybe a supply shock creates its own lack of demand. And a pandemic has demand effects too. People hunker up at home and don’t want to go buy a new boat. One job of the central bank is to spy what the natural real interest rate is, and move the nominal rate accordingly so there is no force unsteadying inflation. Well, if the economy shuts down, people don’t want to spend, since the stores are closed, so by definition they save. (Unless income is shut off). People don’t want to borrow (except to roll over) for the same reason. The marginal product of capital is nothing. So that argues for a pretty sharp fall in interest rates.
But as I think about it, the right answer is that this is the wrong question, and aggregate supply and demand is the wrong framework for thinking about it. What happens if the economy shuts down for a few weeks or months, either by choice or by public-health mandate? Shutting down the economy -- and more importantly turning it back on again -- is not like shutting down and turning on a light bulb. It's more like shutting down and restarting a nuclear reactor. You need to do it carefully, and make sure the parts survive the shutdown intact.
I can see huge financial problems. The store and factory may shut down, but the clock still ticks. Businesses must still pay debts, with nothing coming in. They likely have to pay wages -- otherwise, what will people do to buy food? People have to make mortgage payments and rent, likely with no income coming in. Left alone, there could be a huge wave of bankruptcies, insolvencies, or just plan inability to pay the bills. A modestly long economic shutdown, left alone, could be a financial catastrophe. When the economy starts up again, if half the businesses have gone bankrupt in the meantime there is a lot less ready to start.
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