David Beckworth has now done over 100 podcasts, but the recent interview with Kevin Erdmann would easily make the top ten in terms of general interest.  Kevin has a new book coming out soon (as well as a planned follow-up book), which put together many of the ideas in his blog posts on the real estate bubble and bust.  The podcast necessarily only covers a portion of this material, and I’ll just discuss a portion of the podcast.  But you should definitely get the book when it comes out, as it is loaded with lots of fascinating information that goes against the conventional wisdom.  And that’s because Kevin actually took the time to take a close look at the data.

One big theme is the “closed access” cities such as NYC, LA, the SF Bay Area and Boston.  These are the heart of the new, high-skilled information economy.  For the first time in history, however, we have been seeing people fleeing the engines of prosperity.  This is because of tight building restrictions that force out lower income workers as professionals move in, searching for jobs.  This worsens the economic prospects of low-income workers, and makes our overall economy less productive.

Another theme is that the housing bubble has been misinterpreted.  During the boom, it was higher income people who got the vast majority of mortgages in the closed access cities.  Large numbers of lower and moderate-income people were priced out and fled to the “contagion cities” such as Phoenix, Vegas, Riverside, Tampa and Miami, pushing up prices in those markets.  Contrary to what people assumed at the time, the high prices in closed access cities were not a bubble, rather a rational response to actual and expected rent inflation.  Consistent with Kevin’s view, prices in these cities have returned to bubble highs, despite the headwind of tighter lending standards than during 2006.  There were certainly not too many houses being built in those areas during the boom, rather NIMBYism caused too little construction.  And even in places like Phoenix it’s not clear the main problem was too many houses, as rent inflation kept rising even after the bubble burst.  At the national level, housing construction was not unusually high during the boom years, if you account for all types of housing.  Rather housing construction has been unusually low since 2007.

This is just the tip of the iceberg of Kevin’s work.  I believe Kevin’s story is basically correct, although I interpret the early housing bust (2006-07) slightly differently.  We both agree that tight money depressed housing prices during 2008-12, but Kevin thinks the Fed became a problem in 2006, partly due to somewhat tight money and partly due to Fed communication that the housing market had excesses that could lead to a substantial price drop.  I put a bit more weight on the post-2006 drop in expected future immigration.  The expected US population in 2050 is now 50 million lower than what the Census Bureau expected back in 2006, and 40 million of that decline had occurred by 2012.  The decline is mostly due to lower expected rates of immigration, although a falling birthrate also plays a role.  Recall that 2006 is the year that Bush’s immigration reform project failed and border controls were tightened.  Since then, net immigration from places like Mexico has fallen to a trickle, and it was this immigration that was helping to underpin the housing markets in the contagion cities.

I presume that immigration was not the only issue, but it might help to explain why housing began falling a bit earlier than NGDP growth.

PS.  Kevin’s book will be entitled: Locked Out: How the Shortage of Urban Housing is Wrecking our Economy

Tyler Cowen recently linked to an interesting William Fischel paper from 2016:

In the 1970s, unprecedented peacetime inflation, touched off by the oil cartel OPEC, combined with longstanding federal tax privileges to transform owner-occupied homes into growth stocks. The inability to insure their homes’ newfound value converted homeowners into “homevoters,” whose local political behavior focused on preventing development that might devalue their homes. Homevoters seized on the nascent national environmental movement, epitomized by Earth Day, and modified its agenda to serve local demands, thereby eroding the power of the prodevelopment coalition called the “growth machine.” The post-1970 shift in the American economy from industrial employment to knowledge-based services rewarded college graduates and regions that specialized in software and finance. Residents of suburbs in the larger urban areas of the Northeast and West Coast used existing zoning and new environmental leverage to protect the growth rate of their home values. The regional spread of these regulations has slowed the growth of the economy and perpetuated regional income inequalities. I argue that the most promising way to modify this trend is to reduce federal tax subsidies to homeownership.

1.  Consider it done.  The 2017 tax bill will lead to 60% fewer people using the mortgage interest deduction.  That didn’t take long!  Seriously, I do think this reform will help, but we should not expect miracles.  So far it doesn’t seem to have dramatically slowed the rate of appreciation in home prices, although it’s plausible that the increase would have been a bit faster without the tax change.

2.  The environmental movement did have some major successes, such as cutting air and water pollution.  But the requirement for “environmental impact statements” now seems like a major mistake, and indeed might actually hurt the environment by making it harder to build in major cities.

3.  Not to get too picky, but the idea that OPEC touched off the Great Inflation is a myth.  Here’s inflation before the oil shock of October 1973:

During the early 1960s, inflation averaged a bit over 1%/year.  Monetary stimulus beginning in the mid-1960s pushed the rate up to 6% by the end of the decade.  A slightly tighter monetary policy led to a very small recession, and pushed inflation down to 4.3%.  Price controls then pushed (measured) inflation down to 3% in 1972.  But those controls were used by Nixon as cover to pump up NGDP growth to 9% right before the 1972 election.  By the third quarter of 1973, year over year NGDP growth was running at over 11%, and 12-month CPI inflation was up to 7.4%.  And this is all before the first OPEC oil shock.  It was a demand-side problem.

BTW, budget deficits also played no role in the Great Inflation, as they were quite modest during this period.  If budget deficits caused inflation, by 2019 we’d be well on our way to hyperinflation.  Overall, the Great Inflation was almost 100% monetary policy, even as year-to-year volatility was impacted by oil prices (after October 1973).

Despite these nitpicks, the Fischel abstract sounds basically correct to me—it’s a good way to frame the housing problem.

Let’s start with the obvious:

1.  Trump’s campaign promises were absurd.  He said he’d pay of the national debt in 8 years.  When asked how, he replied “trade”.  Just two days ago, he again claimed that tariffs were helping to pay off the national debt.  The truth is that Trump is conducting the most irresponsible fiscal policy in all of American history.  Because neither the Dems or the GOP are willing to cut spending, Trump’s deficit spending will lead to much higher taxes and slower growth in the future.  But that’s not Trump’s problem.

2.  Trump’s claim that he reduced the unemployment rate from somewhere around 20% or 40% to 4%, almost overnight, doesn’t even pass the laugh test.

3.  Trump is making the trade deficit “worse”, the exact opposite of his promise.

4.  Job growth is no better than under Obama.

5.  He promised 4% RGDP growth, we have 2.7% so far.

So if the economy was as awful under Obama as he claimed during the campaign, then it’s still very bad. However, if we look past Trump’s silly promises, there is some evidence of economic improvement:

The growth rate of 2.7% over the past 6 quarters exceeds the 2.1% average during the Obama recovery.  On the other hand, growth averaged 3.0% during 8 quarters from 2013:Q2 to 2015:Q2, and GOP supply-siders were not lauding that achievement at the time.  Thus the recent surge is clearly not statistically significant.

On the other, other hand, I do think the recent tax changes have boosted growth.  I had expected growth to slow as we approached full employment.  It was slowing in 2016.  We don’t have RGDP futures markets, but I’m pretty sure that growth has been higher than was expected 2 years ago.  Stocks responded as if the tax bill was pro-growth.  The unemployment rate fell by more than expected.  And I’d expect above trend growth to continue for a few more quarters, before slowing sharply during 2019.  So on balance, there is some evidence of an improved economy.

To summarize:

The hyperbolic claims of the Trumpistas are laughable.  We are still recovering in much the same way as under Obama, just a bit faster.  Claims that the U-3 unemployment rate were meaningless and that the true unemployment rate was anywhere from 20% to 40%, have been quietly shelved.  Like everything else with Trump, his economic claims are deeply dishonest, even by the standards of American political discourse.  (Commenters occasionally tell me that other politicians say things like, “I’ll pay off the entire national debt in 8 years through trade.” False, other politicians don’t say things like that.)

It’s far too soon to make any overall judgments about the effects of Trump policies.  Throughout history, governments tend not to end well when led by demagogues that rely on continual, non-stop lying, fake news, demonizing foreigners and minorities, seeking “enemies” in the media and anyone else who dares to disagree, and no respect for the rule of law.  Indeed I know of no such government in all of human history that ended well.  Maybe Trump will be an exception, but let’s wait and see before making that judgment.

PS.  Off topic, the decision to remove Trump’s star from the Hollywood Walk of Fame was a mistake.  Trump is even more famous than when his star was first placed on the sidewalk.  Yes, he’s a bad person, but so are lots of other famous people with stars on the pavement.  More importantly, this decision is a win for the vandals, and will encourage more vandalism in the future.  Incentives matter.

If you asked me to name the five greatest works of macroeconomics during the 20th century, I might produce something like the following list (in chronological order):

1.  Fisher’s Purchasing Power of Money

2.  Friedman and Schwartz’s Monetary History

3.  Friedman’s 1968 AEA Presidential address

4.  The “Lucas Critique” paper

5.  Earl Thompson’s 1982 labor standard of value paper

(BTW, Krugman’s 1998 expectations trap paper might well make the top 10.)

Most economists would replace Thompson’s paper with something like the General Theory by Keynes.  In this post I explained why this 2 page never published paper that looks like something out of the Middle Ages is so important. (Please look at the link; the paper’s formatting is hilarious.)  Thompson’s student David Glasner did some excellent work on this idea in the late 1980s.

Josh Hendrickson has a new Mercatus paper which explains the logic behind the Thompson proposal.  Although Josh’s paper is very clear and well written, I can’t resist adding a few comments, as I fear that the extremely unconventional nature of Thompson’s idea might make it hard for some people to grasp the significance.

Josh starts off with an analogy to a gold standard regime, and then discusses the well-known drawbacks of that approach.  With a gold standard regime, any necessary changes in the real or relative price of gold can only occur through changes in the overall price level (or more importantly NGDP), which can be disruptive to the economy.

Here I’d like to emphasize the importance of the issue of sticky prices.  Adjustments in the overall price level can be costly because many nominal wages and prices tend to be sticky, or slow to change over time.  In contrast, gold prices are very flexible, changing second by second to assure that the gold market stays in equilibrium.  Under a gold standard, the nominal price of gold is fixed, and thus the ability of gold prices to quickly adjust is in a sense “wasted”.  Instead, we ask stickier prices to adjust when the real price of gold needs to change.

When reading Josh’s paper, try to keep sticky wages in the back of your mind.  Whenever the aggregate nominal wage level needs to adjust unexpectedly, some wages will be slow to change, and will be out of equilibrium for a certain period of time.  If there is downward wage inflexibility, especially a reluctance to cut nominal wages, then labor market disequilibrium can persist for years.

Normally, when we think of a government program aimed at fixing a price (gasoline, rents, etc.) we think of a market that is pushed out of equilibrium.  Nominal wage targeting is different.  Under Thompson’s proposed regime, individual nominal wages are still free to change, but monetary policy is adjusted until labor market participants do not want to change the aggregate average nominal wage rate.  In that case, the aggregate average nominal wage should stay at the equilibrium level (although of course individual wages might still occasionally move a bit above or below equilibrium.)

Under our current system, a sudden fall in nominal wage growth actually leaves the aggregate nominal wage too high, as some wages have not yet adjusted downwards.  We’d like to prevent that, by providing enough money so that the aggregate average nominal wage does not need to adjust.

My second comment has to do with the mechanism that Josh discusses:

Suppose that the central bank promised to buy and sell gold on demand at its current market price, but guaranteed that an ounce of gold would buy a fixed quantity of labor, on average. This is a promise to keep an index of nominal wages constant.

This approach is called indirect convertibility, a subject that Bill Woolsey discussed in a series of papers published in the 1990s.  I have a couple brief comments.  First, this sort of scheme need not involve gold at all.  Second it’s essentially a form of “futures targeting”, which is something I’ve done a lot of work on myself.  Indeed, this idea was independently discovered by numerous economists during the 1980s, but Thompson was the first.

If you are having trouble understanding the logic behind the indirect convertibility mechanism for a labor standard, think about the fact that aggregate wage data comes out with a lag, and hence you need to target a future announcement of the wage index.  To assure that monetary policy is set at a position where expected future wages are stable, you need a futures market mechanism where investors could profit any time aggregate wages are expected to move.  Their attempts to profit from wage changes nudge monetary policy back to the stance likely to keep average wages stable.

In addition, the specific proposal discussed by Josh involves a stable wage level, but given political realities it’s more likely the actual target would creep upward at 2% to 3%/year.

Also note that Josh argues that a labor standard is a vastly superior approach for achieving the goals of recent “job guarantee” proposals, put forth by progressives.  I agree.

PS.  I have a new Mercatus Bridge post discussing a WSJ article that called for monetary reform aimed at stable money.

PPS.  My recent post at Econlog on the usefulness of the yield spread got zero comments, which surprised me given all the recent focus on that variable.