these turnover numbers tell a clear story: layoffs aren’t the main problem. A lack of hiring is.

TO BE NOTED:

---

May 15, 2009, 11:38 am

Layoffs Aren’t the Main Problem

By David Leonhardt

What makes the Great Recession different from all other recent recessions is not mainly the number of workers being laid off. It’s how few workers are being hired.

Look at this chart, from the Labor Department’s latest report on labor turnover (which Catherine Rampell also wrote about recently):

Source: Bureau of Labor Statistics

It makes the current recession look qualitatively different from the 2001 recession, right?

The line in the chart is showing the rate at which employers hire new workers. (To be more precise, it is the total number of workers hired in a given month, divided by total nationwide employment, expressed in percentage terms.) Hiring has essentially fallen off a cliff over the last year and a half. It’s far lower than it was during the 2001 recession.

Now consider this chart, which shows the rate at which companies lay off workers:

Source: Bureau of Labor Statistics

Layoffs have clearly soared in the last six months. And the layoff rate has been high for longer in this recession than it was in 2001. But it has not hit a new peak. It’s merely tied its old peak. The layoff rate was roughly the same in March 2009 as it was in March 2001. (Unfortunately, these numbers exist back to just 2000, but another survey suggests the peak layoff rate in the 1990-91 recession was at least as high as the current rate.)

You don’t see these numbers on hires and layoffs very often. The much better known statistic is the net number of jobs added or lost, which comes from the Labor Department’s monthly employment report. The most recent report showed that 539,000 jobs had been lost in April. This net number is the difference between the hiring and layoff numbers, along with a couple of other categories, like the number of workers who quit their jobs.

Imagine, for example, a company that has 100 workers at the start of the month. If it lays off 6 of those workers and hires 5 new workers, the monthly employment report will show a net loss of 1 job. But the turnover survey will show the details behind that net loss: 6 layoffs and 5 hires.

When people talk about the enormous job losses of the last year, they tend to assume that job cuts are the main reason. But these turnover numbers tell a clear story: layoffs aren’t the main problem. A lack of hiring is.

Why? How should the government respond? How should the country’s long-term economic policies be changed to reverse this long-term decline in hiring? All are good, hard questions.

It’s hard to see how we’ll find the right solutions if we are misdiagnosing the problem."

As you can see, there does appear to be a moderate correlation between these two measures

TO BE NOTED:

---

May 14, 2009, 8:06 pm

Reader Feedback: Social Spending and Inequality

By Catherine Rampell

Last week, we ran a couple of posts about some interesting trends in the Organization for Economic Cooperation and Development’s latest “Society at a Glance Report.” In response, a reader who goes by Pzaud wrote:

What would be even more interesting would be to graph inequality of wealth against social spending. According to the OECD, we have the fourth highest inequality, and the fourth lowest social spending. Coincidence?

So, per Pzaud’s suggestion, here’s a graph showing the relationship between these two variables. Click on the image below to see a larger version.

[via Apture]

Here’s how to read this chart. The horizontal axis shows public social spending as a percent of net national income. The vertical axis shows the Gini coefficient, which is a measure of income inequality. A low Gini coefficient means a country has more equal income distribution, while a high Gini coefficient shows more unequal distribution.

As you can see, there does appear to be a moderate correlation between these two measures.

For all 30 O.E.C.D. member countries, public social spending accounts for an average of 24.4 percent of net national income, and the average Gini coefficient is .311. The same respective numbers for the United States are 18.1 percent and .391.

And another noteworthy trend: Across the O.E.C.D., the percent of N.N.I. used for public social spending has generally been growing since the 1980s. This is true for the United States (the green line closer to the bottom), too.

Public Social Spending as a Percent of Net National Income

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harder for smaller-capital companies and start-ups to obtain financing, and could lead to institutional advantages for incumbent, large-cap companies

TO BE NOTED:

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May 11, 2009, 4:46 pm

Shift to Thrift: How Will Americans Save?

By Catherine Rampell

On Sunday I had an article about how many economists expect the days of zero or negative personal savings rates to be over, at least for a while.

While painful in the short run (since consumer spending makes up 70 percent of gross domestic product), a more lasting shift to saving could be good for the economy. More savings → more investment → more capital for American companies → greater economic growth → higher living standards.

This logic assumes, however, that Americans will be saving through financial institutions, rather than their mattresses. And even within financial institutions, their investment options are likely to evolve.

Historical research has found that people who live through a period of low stock market returns (and presumably declines, in the case of the last year) are less willing to invest in stocks, and instead prefer safer, lower-return investment alternatives like bonds. (Aside: On the other hand, people who lived through high-inflation periods tend to be wary of investing in long-term bonds.) More recent financial experiences also tend to have a stronger impact on these long-term attitudes toward investment decisions, according to the study’s authors, Ulrike Malmendier at the University of California, Berkeley, and Stefan Nagel at Stanford.

What does all this mean for near-term savings behavior?

“People are probably going to be thinking more along the lines of ‘How do I generate safe and secure retirement income?’ instead of ‘How do I amass the biggest balance in my account?’” said William Gale, director of both the economic studies program at Brookings Institution and the Retirement Security Project. Workers can invest their retirement savings in (among other things) stock funds, bond funds and annuities, and Mr. Gale expects there to be much more interest in the latter two categories.

Already it appears that financial institutions like Fidelity are developing more products for investors who “are seeking more conservative investment options.”

A shift to lower-risk saving opportunities may result in more secure retirement funds, but it has mixed implications for economic development.

“We may have lost a generation of investors,” said Joseph Brusuelas, a director at Moody’s Economy.com. “People may now look at the stock market as a losing proposition, as some sort of Wild West where the undeserving become rich, and those who play by the rules end up losing.”

This could make it harder for smaller-capital companies and start-ups to obtain financing, and could lead to institutional advantages for incumbent, large-capital companies, he said."

Few employers are hiring, and many workers are leaving their jobs (voluntarily or otherwise, though it appears primarily otherwise)

TO BE NOTED:

---

May 12, 2009, 3:45 pm

Who’s Hiring, and Who’s Quitting?

By Catherine Rampell

The Bureau of Labor Statistics released its March Job Openings and Labor Turnover Summary data today. The takeaways: Few employers are hiring, and many workers are leaving their jobs (voluntarily or otherwise, though it appears primarily otherwise).

Source: Bureau of Labor Statistics, JOLTS

Buried deeper in the report you can find some interesting industry-specific numbers.

There seems to be a lot of turnover in the construction industry. That sector has the highest separation rate (defined as the number of people who left their jobs, whether voluntarily or involuntarily, as a percent of total employment) at 7.5 percent, and also has the highest hiring rate of all sectors at 5.8 percent, both on a seasonally adjusted basis. The numbers for the overall economy, by comparison, were 3.6 percent and 3.1 percent, respectively.

The government has the lowest separation and hiring rates, both at 1.2 percent, as well as the lowest quits rate. In the government, just 0.5 percent of jobs resulted in a quit in the month of March (not including retirements).

The quitting rate was highest for accommodation and food services, where 3.6 percent of jobs resulted in a person’s quitting. The rate was 1.4 percent for payrolls over all."

the unemployment rate for the O.E.C.D. area was 7.6 percent in March 2009

TO BE NOTED: From the NY Times:

---

May 11, 2009, 12:51 pm

Unemployment Around the World

By Catherine Rampell

The Organization for Economic Cooperation and Development today released some updated data on unemployment rates in its member countries.

According to the report, the unemployment rate for the O.E.C.D. area was 7.6 percent in March 2009, which is 0.3 percentage point higher than the previous month and 2 percentage points higher than the rate a year earlier.

Below, via ManyEyes, you can find an interactive graph of unemployment rates from October 2008 to March 2009 in most of the O.E.C.D. countries. Note how badly Spain (the top, lavender line) is doing these days.

Tips: To view just a single country, click on the icon in the legend. To view multiple countries, control-click. To view a range of countries, shift-control-click."

Consumers are proving to be much more resilient than previously expected

TO BE NOTED: From News N Economics:

"Adding to Altig's consumer spending dispute

Saturday, April 18, 2009

David Altig, senior vice president and research director at the Atlanta Fed, argues (hat tip, Mark Thoma) that a piece written in Economix on Tuesday (NY Times economics blog) is not, as David calls it, "that tight". Specifically, the sole purpose of the article was to highlight that the sustained retrenchment in consumer spending is a "historical oddity". And as David argues, it is not an oddity at all.

I agree with David: this Economix piece has its flaws and is definitely outdated (see last paragraph). In contrast, I don't agree with David's measure of cumulative PCE loss, which understates the impact of the shocks to consumer spending in the current cycle. Each indicator has its own cycle within the overall economic cycle; and the best measure of cumulative PCE loss is using the peak to trough of PCE, rather than the economic peak (the NBER dated peak, which David uses) to the PCE trough.

The chart illustrates the cumulative PCE loss using monthly data, as measured by the economic peak to PCE trough (blue) and by the peak and trough of PCE itself (red) over the last eight cycles (including this one). Normally, the different measures present almost identical results. With the exception of the current cycle, the biggest difference occurred in the 73-75 recession, a -0.2% differential.

However, this time it matters by a -0.6% differential. The cumulative PCE loss using the peak to trough PCE measure is -2.5% compared to that using the economic peak to PCE trough measure, -1.9%. PCE was rising through May 2008, five months after the peak of economic activity as defined by the NBER.

The PCE peak to trough paints a darker picture; one that puts this cycle on par with one of the bigger recessions, 1973-1975 (Note: I disagree with David's calculation of the 73-75 PCE loss; it appears to be too little).

One last thing: the Economix article is behind the times, even in the comment that the "sustained" consumer spending decline is an oddity. Consumers are proving to be much more resilient than previously expected. Currently, this PCE cycle is unlikely to set any records, not even that of the first time that PCE contracted for three consecutive quarters since 1947. By my estimates, March real PCE (to be released on April 30) needs to fall by more than $74.6 billion in order to post a third consecutive quarterly decline; that is unlikely.

Rebecca Wilder

Posted by Rebecca Wilder

virtues of a “limited purpose banking” system, one that would greatly reduce banks’ abilities to take on risk

TO BE NOTED: From the NY Times:

---

April 15, 2009, 2:28 pm

The Post-Recession Appetite for Risk and Regulation

By Catherine Rampell

Wednesday, in his speech at Georgetown, President Obama proclaimed that “It is time to lay down tough new rules of the road for Wall Street to ensure that we never find ourselves here again.”

But just how restrictive will, and should, those rules be? Will there indeed be a permanently lower tolerance for financial risk-taking, when risk-taking and financial innovation have been a prized part of economic growth over the last few decades?

The lead-up for such “tough new rules” so far has been somewhat equivocal. America — unlike its European counterparts — has generally prioritized temporary stimulus over “permanent” regulation in the face of an economic contraction. We like to address a particular market failing in the short-term, rather than reassigning the way markets work for the long haul. In fact, America’s long-term trend over the last few decades has been toward less, rather than more, regulation. That political habit may be hard to break, no matter the volume of populist calls for straight-jacketing the private sector.

Still, a few prominent economists — whose discipline is usually seen as the bastion of laissez-faire — are fighting to sharply reverse this decades-long, freer-financial-market trend.

For example, Paul Krugman, the Nobel laureate and Times Op-Ed columnist, last week wrote about the need for new regulations to make banking “boring again” — in other words, by legally limiting bankers’ abilities to get too creative with the ways they slice, dice and assemble their financial toys.

Amar Bhidé, a business professor at Columbia University, has similarly argued for a return to “primitive finance,” which would mean greatly limiting what commercial banks are allowed to do, and reviving a more stringent version of Glass-Steagall.

And Laurence Kotlikoff, an economics professor at Boston University, has vocally proselytized the virtues of a “limited purpose banking” system, one that would greatly reduce banks’ abilities to take on risk. In this system, commercial banks would initiate only AAA-rated mortgages and business loans (approved and rated by the government, rather than by private ratings agencies), and then bundle and sell those loans within mutual funds. And that’s all these banks could do.

These aren’t the only economists arguing for what may sound like extreme curbing of the financial system. Other critics have more or less called securitization a dirty word, and suggested that the process of bundling loans and other financial products may be inherently toxic (no matter how much we upgrade the ratings agencies). They also fear that morally hazardous bailouts may yet increase banks’ appetites for reckless risks.

Others say, though, that we may emerge from the current crisis with financial institutions that are much more risk-averse than they were before the recession. In this situation, perhaps tighter regulations would not be necessary; perhaps they might even be detrimental. An economy needs some desire to assume risks in order to function and to grow, and perhaps, then, the government should be encouraging more financial innovation when the private sector’s instinct is to pull back. Besides, some say, maybe having a major financial meltdown only every 80 years or so isn’t such a bad track record, given the economic growth the existent system has produced (or at least enabled).

It will be interesting to see which, if any, of these views wins out in the coming months.

Readers, I put the question to you: What kind of financial system will emerge — either due to market forces or regulatory forces — once the dust of this crisis settles? And what kind of financial structure should we want to emerge?"

Libertarian progressivism distrusts big increases in government spending because that spending is likely to favor the privileged

From Economix. Doesn't this sound like a libertarian Democrat?:

"The Case for Small-Government Egalitarianism

By Edward L. Glaeser

Edward L. Glaeser is an economist at Harvard.

The stimulus debate badly needs the voices of that now-rare breed: Andrew Jackson’s intellectual descendant, the small-government egalitarian.( THE LIBERTARIAN DEMOCRAT )

Today, Franklin Roosevelt’s heirs — big-government liberals eager to right the wrongs of the world by expanding the size of the government — argue against small-government conservatives. The supposedly more progressive side wants the stimulus package to take the form of government spending, while their opponents want bigger tax cuts for businesses and more prosperous Americans.

The missing movement, small-government egalitarianism, would favor tax cuts, but only if they were aimed at ordinary Americans.( I AGREE TO AN EXTENT. THEY WOULD BE MY LARGEST CUTS, BUT CUTS FOR INVESTMENT MAKE SENSE. )

Libertarian progressivism distrusts big increases in government spending because that spending is likely to favor the privileged( THAT'S OUR SYSTEM, YES. ). Was the Interstate highway system such a boon for the urban poor? Has rebuilding New Orleans done much for the displaced and disadvantaged of that city? Small-government egalitarianism suggests that direct transfers of federal money to the less fortunate offer a surer path toward a fairer America.( THAT'S WHY I FAVOR A GUARANTEED INCOME. )

Political divisions have not always pitted big-government egalitarians against small-government conservatives.

At the start of the 19th century, the fans of big government, like Alexander Hamilton and Henry Clay, saw public projects as a means of strengthening the nation rather than reducing inequities. Their policies, such as tariffs and canals, often enriched the prosperous more than the poor. Conversely, the post-Era of Good Feelings Democratic Party was built around Andrew Jackson’s small-government egalitarianism. Jackson’s fight against the prosperous Philadelphian Nicholas Biddle and the Second Bank of the United States epitomized his desire to reduce privilege by reducing the size of government.

In the 20th century, President Woodrow Wilson campaigned on a “New Freedom,” opposing Teddy Roosevelt’s big-government Progressivism. While Roosevelt wanted the government to manage monopolies, Wilson wanted trust-busting and less protectionism. Wilson perceptively noted the dangers of too much government: “If the government is to tell big business men how to run their business, then don’t you see that big business men have to get closer to the government even than they are now?”

Current American political discourse labels people as either anti-government or pro-equality, but wanting to help the poor should not require the abandonment of sensible skepticism about expanding the size of the state. Many of my favorite causes, like fighting land use regulations that make it hard to build affordable housing, aid the poor by reducing the size of government. In the wake of Hurricane Katrina, I also argued that it would be far better to give generous checks to the poor hurt by the storm than to spend billions rebuilding the city, because those rebuilding efforts would inevitably help connected contractors more than ordinary people.( I AGREE ON BOTH POINTS )

Today, the New Deal’s heirs are vociferously arguing that more( I SAY SOME, BUT LESS. ) of the stimulus package needs to be spent on public works rather than tax cuts. The big-government skeptics point out that the government can’t spend hundreds of billions of dollars on infrastructure projects both wisely and quickly. Good infrastructure spending doesn’t happen on a dime, and applying a “use-it-or-lose-it” rule to speed up spending will lead to a lot of waste. The country could certainly invest more, in both human and physical capital, but that spending should follow the rule that benefits must exceed costs( THIS IS ESSENTIAL. ). Good investments need plenty of time to plan and implement, which pretty much rules them out as good fiscal stimulus. Moreover, since many of these projects will disproportionately benefit the prosperous, many of them can be financed with user charges( FINE ).

Yet skepticism about vast public works does not necessarily lead towards Alf Landon-like antipathy towards stimulus, or towards tax cuts for big businesses and the wealthy. A quite plausible alternative, which is partially present in the president-elect’s proposal, is for the fiscal stimulus to primarily take the form of payroll tax cuts for poor and middle-income Americans. Those are, after all, the people who are most likely to spend the money quickly.

Targeted tax aid for poorer Americans would be far more egalitarian than most kinds of infrastructure spending, such as broadband technology. Sensible infrastructure projects wouldn’t disproportionately employ the least-skilled Americans. Forgoing the payroll tax for households earning less than $75,000 a year is surer progressivism than bridge-building.

Economics has little say about how egalitarian society should be. That is a question for moral philosophers and the democratic process( POLITICAL ECONOMY ). However, economics does tell us to choose efficient means of redistribution, and cash transfers almost always involve less waste than the alternatives( I AGREE ). Reducing the payroll tax not only avoids the problems inherent in trying to spend infrastructure money quickly, but it can also directly target aid to the poor, who need help more and will spend the cash more quickly. Now that’s the kind of small-government egalitarianism that would have appealed to Andrew Jackson."

I disagree on two points:
1) I favor a sales tax cut over a payroll tax cut, but I do like the payroll sales tax cut over any other proposed option.
2) I favor tax cuts for investment. The primary problem we are currently fighting is the fear and aversion to risk, which such targeted tax cuts might help.

Otherwise, I'm in general agreement. Too bad he's never heard of a libertarian Democrat.

"Professor Mulligan has been writing about the current financial crisis on his own blog, and we’re excited to have him contributing here as well."

Here's some very good news:

"Introducing Our New Panelist: Casey B. Mulligan

By Catherine Rampell

I’m pleased to introduce Casey B. Mulligan, an economist at the University of Chicago, as the newest addition to our “Daily Economist” panel. His first post appeared today.

Casey B. Mulligan of the University of Chicago joins Economix’s “Daily Economist” panel.

Professor Mulligan has been writing about the current financial crisis on his own blog, and we’re excited to have him contributing here as well. Besides the “Panic of 2008,” he has written about a wide variety of subjects in his academic and general interest writing, including everything from taxes to the gender wage gap to Social Security to the economics of retirement to voting to military conscription to the economics of Internet piracy and anti-pornography policies, among other topics.

Please join us in welcoming Professor Mulligan to Economix."

Good luck to Professor Mulligan, and a wise decision by the NY Times, which I continue to find interesting.

"Moral of the story: If you want to design such a scheme and get away with it, make it legal"

As I said, I believe this. From Economix: "Do Bailouts Encourage Ponzi Schemes? By Utpal Bhattacharya":

"Say I convince my friend Elvis to invest $100 with me, promising to double his money in a month. Next I convince my friends Simon and Garfunkel. They each give me $100, and I use the $200 to pay off Elvis. Elvis is impressed and tells all his friends. I take $100 each from four of them — John, Paul, George and Ringo — and use the $400 to give back $200 each to Simon and Garfunkel. Suddenly everyone wants to invest with me. I take money from eight of them, then 16, then 32, and so on. When a lot of people are involved, I disappear with the money that I raised in the last round.

The scheme that I have just illustrated is called a Ponzi scheme. It is named after Charles Ponzi, who raked in $15 million in nine months in 1919 and 1920. At the height of his success, Mr. Ponzi was hailed by those he was cheating as the greatest Italian who ever lived. “You’re wrong,” he said modestly, “there’s Columbus, who discovered America, and Marconi, who discovered radio.” “But, Charlie, you discovered money,” they told him.

What is being called the biggest Ponzi scheme of all time was uncovered just a few days ago. The Wall Street legend Bernard Madoff is reported to have told influential investors that he could guarantee them a 1 percent monthly return. That promise probably sounded too good to be true — and it was.

Ponzi schemes — to the extent that people realize, even subconsciously, that something is not right — should work only if investors are irrational ( WISHFUL THINKING ). Investors in the last round know that they will lose their money when the organizer disappears with their funds. No one wants to play the last round, making the second-to-last round actually the last. Those people will refuse to take part as well. Using this logic again and again, no one should take part.

But sometimes our greed or our naivete trumps our rationality ( WISHFUL THINKING ). Almost a century after Charles Ponzi, people continue to fall victim to Ponzi schemes like the one attributed to Mr. Madoff. A recent Google search revealed more than 100 such schemes being investigated all over the world.

Not all Ponzi-like economic activity is bad or illegal.

Social Security, which involves the younger generation paying some of the retirement benefits of the older generation, is a perfectly legal Ponzi scheme.

Asset pricing bubbles, where the intermediary takes in a cut every round, is a Ponzi scheme grafted to a bubble, and they are legal. For example, when people take out mortgages they can’t afford, based on the expectation that their homes will continue to increase in value, they are engaging in legal Ponzi and bubble activity.( BECAUSE AT SOME POINT SOMEONE WILL BE WRONG? )

But what happens when the music stops and people find themselves playing the last round of the Ponzi game?( OOPS )

The federal government may chose to spend billions to bail out the last-round players to protect overall financial stability ( I BELIEVE SO, AND I BELIEVE MOST PEOPLE DO ). The Ponzi participants will get a piece of the bailout but will still have a net loss. The problem is that taxpayers have to foot the bailout bill, and they may have even greater net losses than the people who initially signed up for the Ponzi game ( AND? YOUR POINT BEING? ).

If taxpayers stand to lose more money than Ponzi players, it is suddenly rational to play the game. That’s because only by getting a piece of the bailout will Ponzi participants protect themselves from the larger losses faced by taxpayers( THAT'S A LOT OF PLANNING ). This is what happened in the early 1990s in nearly all the countries transitioning from communism: promises of state bailouts encouraged gigantic Ponzi schemes ( I SAY THAT IT WAS THE MAIN CAUSE OF THIS CURRENT CRISIS ). In Albania, it even led to a civil war ( IT MIGHT LEAD TO UNPLEASANT SOCIAL REACTIONS HERE ).

Therefore, while some Ponzi-like behavior is legal and even beneficial for our economy, bailouts only serve to reinforce behavior that can lead to even riskier Ponzi schemes( CORRECT ). So, though many of us recognize deals that are too good to be true, bailouts will encourage us to take part in such deals( THEY ENCOURAGE RISKY BEHAVIOR, WHICH IS THE CAUSE OF OUR CURRENT CRISIS. NAMELY, TOO MUCH RISK ). The $700 billion federal bailout may eventually lead to Ponzi schemes large enough to make Mr. Madoff’s reported $50 billion swindle pale in comparison ( WHICH IS WHY WE NEED TO CHANGE THE SYSTEM. I BELIEVE THAT WE CANNOT GUARANTEE BAILOUTS LIKE THIS ANY LONGER ).

Moral of the story: If you want to design such a scheme and get away with it, make it legal — like investments in subprime mortgages, or investments in energy from water. Then involve as many people as possible, so that it becomes “too big to fail.”( THAT'S WHAT I BELIEVE HAPPENDED ) Some of the $700 billion bailout money may actually be used to rescue some of your investors ( THAT'S HAPPENING NOW ).

I believe that the Implicit and Explicit Government Guarantees to intervene in a financial crisis are what explain the enormous risk by individual human agents that led to this crisis. This post lends credence to that belief, in my opinion.

"With prices plummeting, foreclosures soaring and the mortgage market in disarray, the country should rethink a federal housing policy that has failed

Two interesting posts about government intervention in the Housing Market, which is an issue we might want to consider given that the government is currently considering a massive intervention. It would seem prudent to have some goals or principles available with which to assess these various plans for dealing with housing crisis.

First, Dean Baker in the Guardian:

"The Bush administration is packing its bags and heading out the door. As they leave, we should insist they take the garbage with them. Among the items in the garbage pile should be the "ownership society".

With the collapse of the housing bubble throwing the economy into the worst recession in 70 years and the stock market deflating to levels not seen for more than a decade, the ownership society's proponents have not been anxious to talk about this concept lately. However, that shouldn't stop the rest of us from bringing up the topic.

Just to be clear on definitions, what distinguished the proponents of the ownership society from other people is that they argued for ownership as an end in itself. In the case of social security, the ownership crew wanted workers to take the risk of market fluctuations and bad investment choices, rather than having the guaranteed retired income provided by social security.

Their argument implied that these risks were ends in themselves. The returns from individual accounts could easily be beaten by the collective investment of social security money, which would lead to lower administrative costs than individual accounts. Incidentally, the higher administrative costs associated with individual accounts would mean higher income to the financial industry."

I think that there is still an argument for owning a home as opposed to renting, even, or especially for, people with less money. Namely, their money is being spent on an asset which they can sell at some point in the future, not going to a landlord. So, ownership, as opposed to renting, is a better investment, and an end in itself.

"When it came to housing, the ownership crew wanted everyone to be a homeowner. It is easy to show that in normal times it will not make sense for many people to own. There are large transaction costs associated with buying and selling. (Incidentally, these transaction costs are income for the financial industry.)

Typically, the round-trip cost of buying and selling a home, which includes realtor fees, points on mortgages, the cost of appraisals, title checks and other items, will be close to 10% of the sale price.

This is a substantial addition to housing costs for a family who will only be in a house for a short period of time. For a family buying a $300,000 house that incurs 10% round-trip transaction costs, the addition to their housing expenses will be $7,500 a year (more than $600 a month) if they live in this home for four years.

Tens of millions of families will live in their homes for less than four years. Changing employment and family situations or health factors often force people to move. For younger, less stable families, homeownership is likely to be a bad financial bet."

Yes, but that's a different point. Obviously, at least to me, the buyer needs to be able to afford the house. That doesn't mean that owning a house isn't an end in itself and a better investment than lending.

By the way, it's fine to point out that there are vested interests lobbying for any policy, but, remember, there are generally two sides to that lobbying. One can imagine Landlords lobbying against ownership by producing frightening scenarios against owning a home, trying to frighten away even qualified buyers. I don't know that such lobbying exists, but, in and of itself, lobbying or vested interests don't disqualify a policy. It's a version of Poisoning The Well, quite frankly.

"Of course that's the case in normal times. Encouraging people to buy homes as the bubble was pushing house prices to ever more unsustainable levels in the years 2003-2007 was the height of foolishness. This social engineering by the ownership society crew helped to inflate the bubble to ever more dangerous levels. The new homebuyers in these years, at least in the bubble markets, saw any wealth they had managed to acquire destroyed in the collapse."

Here we disagree as well. While government incentives can influence behavior, they cannot mechanically cause people to ignore sensible investment practices and procedures, or commit fraud, say. I can agree that these incentives helped justify some of the impetus for people buying houses, but not for the practices by individual human beings that caused this bubble.

"While we should not expect any mea culpas from the ownership gang, we should demand an end to their influence on public policy. In the case of retirement policy, the focus must be on providing mechanisms through which people can put aside money for a secure retirement. We don't have time for those who want to give people ownership at the cost of a secure retirement.

In the case of housing policy, the goal must be to give people good secure housing options. In some cases, this will mean homeownership. However, for many families, at certain points in their life, renting will be the better option."

I want to to stick to housing. Frankly, the only reason that I can see for Baker bringing up Social Security is to Poison The Well again, in the sense that he feels people's views on Social Security will positively effect his argument about housing. The two issues are not identical.

However, what he says about owning a house or renting is, again, obviously true. For some people, renting is the better option.

"A serious housing policy must ensure that good rental options exist. It should also seek to provide renters with some of the housing security that homeowners now enjoy. For example, restrictions on the grounds for which tenants can be thrown out of their homes (which exist in many cities) would provide renters with much greater security."

No sooner does he criticize housing policies, then he advances policies for renting. Surely we've learned to be dubious about government's good intentions as compared to its actual effects. Wasn't that the point?

"The disaster hitting the economy and the country's homeowners should force the Obama administration to rethink national housing policy. If progressives had been responsible for promulgating the same sort of disaster as the ownership society crew, they would not be allowed near the halls of power for the next half-century.

We don't have to banish the ownership crew, just their ideology. We need a serious discussion on housing policy that focuses on the goals that we want to achieve. We can't afford have the luxury of a housing policy that is driven by an ideology of homeownership."

It's a good idea to critique and justify all government intervention in the housing market, but it still seems to me to better, on the whole, to own a house rather than rent, if you can afford to do so.

Now Edward L. Glaeser and Joseph Gyourko on Economix:

"America shouldn’t waste the current housing crisis. With prices plummeting, foreclosures soaring and the mortgage market in disarray, the country should rethink a federal housing policy that has failed."

That's a very good idea. I don't like the use of the word "waste", which seems to be straining to find a benefit to the crisis. On the whole, I'd rather use less unnerving pedagogical tools.

"The policies that got us here, like Freddie Mac, Fannie Mae and the home mortgage interest deduction, put too much faith in subsidized borrowing.

Encouraging everyone to make highly leveraged bets on housing was patently a mistake. Housing policies of the past also erred by aiming at amorphous, often contradictory objectives, including higher homeownership rates, more affordable housing units and, most recently, higher prices. Those policies then mistakenly applied the same policy medicine to every housing market, whether housing was abundant and inexpensive or scarce and unaffordable. "

The incentives might have contributed to the problem, but they didn't cause the problem. An incentive is just that, a reason for doing something. There are always other possibilities and reasons to be considered in any action.

"The problems of old-style housing policy are well illustrated by the unwise proposal being considered to provide subsidized loans to home buyers at 4.5 percent interest. The historical, quite modest relationship between interest rates and housing prices suggests that this proposal will increase housing prices by at most 5 percent. A 5 percent price rise will do little to stem foreclosures in markets where prices have already fallen by 30 percent."

Here I agree, and said that we should let housing prices fall another 5 %, which would be a better deal for the buyers if rates remained roughly where they are now.

"Subsidized lending looks cheap, but isn’t.

When the government lends, taxpayers end up paying for the defaults that follow. Those people who claim that the plan will be cost-free seem to forget that this spurious argument was made to justify Freddie Mac’s and Fannie Mae’s credit guarantees. The policy will also encourage more overbuilding in Las Vegas and more over-borrowing in Detroit, neither of which is a good policy objective. "

Subsidies are not cost free. Although, one can imagine the government running a mortgage business that makes money. Here's where the contradiction comes in, because, in order for it to do so in the taxpayer's best interests, the terms would have to be very stringent, and wouldn't be possible for borrowers on the margin. If you decide to loan to more risky borrowers, then you have to state up front that possible losses are acceptable and justifiable.

Subsidies can effect the market in which they are used, often with unanticipated results. They should be used carefully.

"In our new book, “Rethinking Federal Housing Policy,” published by the American Enterprise Institute (and available for free download here), we argue that federal housing policy should ensure that our poorest citizens are able to live in decent housing ( I AGREE ), and should address the high housing costs facing many middle-income Americans ( DON"T AGREE, BUT THIS COULD BE DUE TO A DISAGREEMENT ABOUT MIDDLE CLASS ).

These are two distinct problems that require two different solutions — neither of which involves subsidized lending."

"The first problem, the shortage of housing for the poor, is best solved by providing more housing vouchers, not expensive tax programs aimed at stimulating construction of affordable housing. Subsidizing developers to build new housing for the poor makes no more sense that paying auto companies to provide a special line of poor people’s cars. Our current system, where the poor generally buy used cars, is a much more efficient way of providing cheap transportation. Section 8 vouchers can enable the disadvantaged to live in existing homes, which is much cheaper than new building.

The Low Income Housing Tax Credit, the primary tool for subsidizing housing supply, makes the mistake of trying to apply the same rules everywhere. It subsidizes new housing in Manhattan, which needs more building, and in Buffalo and Houston, which already have plenty of cheap homes. A better approach would be to scrap the tax credit and make Section 8 vouchers more available and portable across cities."

That's fine, but a voucher is a subsidy, isn't it? It could effect prices. Anyway, yes, I prefer a voucher.

"Section 8 vouchers aren’t going to do anything to ease the high housing costs facing middle-income Americans, though. That problem requires policies that reduce the barriers to building.

The current housing price slump shouldn’t disguise the fact that homes in San Francisco and New York remain extremely expensive by historical standards. Prices are far above construction costs because robust housing demand, fueled by rising economic productivity, has collided against barriers to supply, like minimum lot sizes and height limits.

Borrowing subsidies, including the home mortgage interest deduction, do little good when housing supply is constrained. In markets with limited supply, credit subsidies push up housing prices, and make housing less, not more, affordable.

Moreover, the benefits of the deduction go disproportionately to richer Americans who itemize on their tax returns and own bigger homes. Rather than a new round of credit subsidies, it makes more sense to gradually reduce the upper limit on the home mortgage interest deduction and shrink the public role in encouraging people to bet big on housing.

The only path towards widespread affordability is to build more, which requires reducing NIMBYist regulations. Localities tend to put their own interests ahead of the nation’s interest by restricting building in order to keep prices up and reduce congestion. The federal government should increase its efforts to counter this tendency. After all, stopping building in one area just leads to building and more congestion somewhere else. In other settings, when groups try to increase prices by restricting supply, the government sends in the antitrust police.

In the housing context, this means prodding restrictive, high-cost areas to permit more building. New York and greater San Francisco are the two most productive areas in the country, but people have increasingly moved to lower-wage Sun Belt cities because those areas have low housing prices created by unfettered supply.

It is bad economics to let local barriers drive people to less productive areas, and it is also bad environmentalism. The environmentalists who prevent building in temperate California are actually increasing carbon emissions, by driving people to build in the far more energy-intensive suburbs of Houston and Phoenix.

Expensive localities are never going to give up their growth controls on their own, but the stimulus package provides a natural tool for promoting affordability. If some aid to expensive states is made conditional on permitting more construction, then pricey places will face incentives to permit more units and promote affordability. Those incentives will encourage restrictive cities and towns to look beyond their borders, and to make America more affordable by permitting more construction in the high-price housing markets that are undersupplied and unaffordable even to the middle class."

Here I agree. If people really want housing prices to stay down, then they need to change the regulations on housing construction and use. It's a trade off, but it's the one sure way to lower housing costs.

In essence, I agree that we should reconsider our housing policy now. Baker makes a good point about the vacuousness or negative consequences of boldly declaring an "Ownership Society", not tied to sensible economic practices. But Glaeser and Gyourko have better ideas about how to deal with our housing policy.

"Like so much in the labor area, as a practical matter the heated battle over the WARN Act became much ado about nothing."

Alan B. Krueger with a post about Labor Relations on Economix:

"The Republic Windows case was particularly newsworthy because the company’s problems involved the curtailment of credit by Bank of America after the bank had received considerable subsidies from the federal government. An effective sit-in and public relations campaign were able to shame Bank of America into extending limited credit to Republic Windows to provide its workers severance pay and limited benefits.

But the bigger picture of this saga should not be missed: companies frequently close without giving their employees the required 60 days of advance notice.

A seminal study by John Addison and McKinley Blackburn found that displaced workers were hardly more likely to receive 60 days’ advance notice of a layoff after the WARN Act took effect than they were before it went into effect.

A subsequent report by the General Accounting Office found that only one quarter of mass layoffs and plant closings were subject to the WARN Act advance-notice requirements, and even more disturbing, “Employers provided notice for approximately one-third of layoffs and closures that appear subject to WARN requirements.”

Thus, the law applies in only a minority of plant closings and mass layoffs, and apparently it is widely violated, with little consequence, when it does apply. Indeed, it is even possible that in the Republic Windows case the company might be able to argue that it qualified for one of the various exceptions in WARN.

Like so much in the labor area, as a practical matter the heated battle over the WARN Act became much ado about nothing. Relatively few additional workers were warned about pending layoffs and plant closings as a result of WARN. Indeed, the available evidence makes one wonder why so many employer groups fought so hard to oppose the law if it ultimately turned out to hardly affect the way employers operated. "

My own belief is that much of this kind of legislation is symbolic, and is a test of power between interest groups, namely Organized Labor in the Democratic Party and the Employers represented by the GOP. That doesn't mean that issues aren't involved, and such symbolic contests are actually quite important. But, in real life, workers and employers generally have good reasons to work things out themselves. Such laws can be useful, however, in preventing egregious abuses, and, quite frankly, should be enforced.