Recent links

It’s becoming increasingly difficult to keep up with all of the stuff I should be reading, but here are a few links I noticed after returning from vacation.

David Glasner has a very good post on NeoFisherism, and I especially like his conclusion:

But the problem for monetary theory is that, without a real-value equivalent to assign to money, the value of money in our macroeconomic models became theoretically indeterminate. If the value of money is theoretically indeterminate, so, too, is the rate of inflation. The value of money and the rate of inflation are simply, as Fischer Black understood, whatever people in the aggregate expect them to be. Nevertheless, our basic mental processes for understanding how central banks can use an interest-rate instrument to control the value of money are carryovers from an earlier epoch when the value of money was determined, most of the time and in most places, by convertibility, either actual or expected, into gold or silver. The interest-rate instrument of central banks was not primarily designed as a method for controlling the value of money; it was the mechanism by which the central bank could control the amount of reserves on its balance sheet and the amount of gold or silver in its vaults. There was only an indirect connection – at least until the 1920s “” between a central bank setting its interest-rate instrument to control its balance sheet and the effect on prices and inflation. The rules of monetary policy developed under a gold standard are not necessarily applicable to an economic system in which the value of money is fundamentally indeterminate.

Viewed from this perspective, the Neo-Fisherian Revolution appears as a kind of reductio ad absurdum of the present confused state of monetary theory in which the price level and the rate of inflation are entirely subjective and determined totally by expectations.

I’ve also argued that NeoFisherism exposes important gaps in the New Keynesian model.

Kevin Erdmann has another of his excellent posts on the US housing bubble.  Here’s an excerpt:

From the end of 1997 to the home price peak in early 2006, home prices nationally rose about 110%.  Rent rose 30%, which was 10% more than core CPI.  So, about 1/3 of that rise was simply reflected in experienced cash flow increases.  The required yield fell from 4.1% to 3.2%.  That corresponds to an increase of just under 30% in price/rent.  So, about 1/3 of the rise in home prices can be attributed to falling yields.  And, persistent rent inflation pushed cash yields down from 3.2% to 2.4%.  That corresponds to an increase of  just over 30% in price/rent.  So, about 1/3 of the rise in home prices can be attributed to persistent rent inflation.

Two-thirds of the rise in nominal home prices came, then, from rent.  And, rent continues to rise now that we are past the recession.  I think this demonstrates two ideas.  First, we don’t need a speculative frenzy to explain the 2000s housing market.  The rising rents were done.  They happened.  The yields were falling in line with long term TIPS yields.  And expectations of rent inflation were justified by past and subsequent developments.  The rising prices in the 2000s housing market reflect reasonable, income-based long term investing.

In my view the crackdown on immigration slowed the housing market in 2006, especially in the 4 subprime states.  But I’m increasingly persuaded by Kevin’s argument that prices were not far out of line, and that it was primarily tight money that depressed the housing market, especially after 2007.  Suppose NGDP had kept rising at 5%/year—where would home prices be today?

Like Kevin, Mark Sadowski likes to do long series of posts on a given topic.  He has one set of posts (over at Marcus Nunes’ blog) on VAR studies of QE.  Here’s a portion of his concluding post that summarizes the series:

Modern applied macroeconomic models of the liquidity trap usually rely on some version of the David Romer’s ISLM/ISMP model.

If expected short-term real interest rates cannot be lowered to a level prescribed by some version of a Taylor Rule, the only way to increase real output is by increasing inflation expectations. This is because the central bank can only determine the level of real output through changes in the expected short-term real interest rate.

But as we have seen here there is really is no monetary transmission channel that works primarily, much less exclusively, through expected short-term interest rates. Thus any model that relies on the supposed inability of the central bank to lower expected short-term interest rates to demonstrate the ineffectiveness of monetary policy is guilty of assuming its conclusion.

Central banks usually target short term interest rates as an instrument of monetary policy not because there is any credible mechanism by which they directly and significantly impact the economy, but because 1) they are quickly and accurately measurable, 2) the central bank can exercise a great deal of control over them, and 3) because changes in them usually lead to reasonably predictable outcomes in terms of policy goals. These qualities may make short term interest rates convenient as an instrument of monetary policy away from the zero lower bound, but they should in no way cause us to confuse short-term interest rates for the actual mechanisms by which monetary policy is transmitted.

Marcus also hosts other market monetarists, such as Benjamin Cole and (more recently) James Alexander.

And this essay on regulation by John Cochrane might be the best post I’ve read all year (with the exception of Scott Alexander posts.)

PS.  Don’t forget that I also do posts at Econlog.  My latest is on Paul Romer’s criticism of the Chicago School, and before that I do one on the superiority of markets over policymakers–they don’t mind admitting error.





49 Responses to “Recent links”

  1. Gravatar of bill bill
    8. August 2015 at 05:26

    Krugman did a recent post called The Economy Vanishes. He highlights that growth over the last 6 years has been better than the growth during the first 6 years under Bush during that recovery. PK implies that this is happening in spite of bad fiscal policy since 2009 without seeming to realize that this might also mean that maybe it’s that fiscal policy doesn’t really matter. He always tears up others for not updating their models to account for reality, yet misses the chance to reappraise his own models. Heck, Federal spending growth from 2001 to 2007 was higher than during the 1990’s and since 2009, yet it’s the worst period of private job growth since the Depression.

  2. Gravatar of Scott Freelander Scott Freelander
    8. August 2015 at 06:00


    While you’re reading, you might like this. The Obama administration is calling for occupational licensing reform.

  3. Gravatar of ssumner ssumner
    8. August 2015 at 06:54

    Bill, I don’t agree that growth has been faster during the Obama recovery than the Bush recovery–don’t know where he gets his data.

    Scott, Yes, I saw that.

  4. Gravatar of ssumner ssumner
    8. August 2015 at 06:56

    Bill, OK, he’s talking about jobs growth, not GDP growth. But we started from a very depressed economy in 2009, so the comparison is meaningless.

  5. Gravatar of Ray Lopez Ray Lopez
    8. August 2015 at 07:04

    Wow, there’s so much ‘meat’ in this sausage of a post by Sumner I don’t know where to begin. A lot of baloney meat.

    David Glasner is simply repeating the well-known observation that money is not a factor in most modern-day econ models (Richard A. Werner deserves credit for this observation, among others), yet there’s a cost to using money and intermediaries (nevertheless money is neutral, we’re talking about the role banks play in allocating credit and creating bubbles).

    Kevin Erdmann is grasping at strawmen. It’s clear to anybody in the field (as I am, a rich landowner) that the 00s had a bubble in real estate. That said, we bought at the top of the market in DC (2006), did a Starker 1031 exchange, and actually, after a slight dip, have made money on our investment. Location x 3.

    Sumner: “in my view the crackdown on immigration slowed the housing market in 2006, especially in the 4 subprime states” – really? I did not know illegal aliens could buy housing. Lern someding new every-a daay…

    “Like Kevin, Mark Sadowski likes to do long series of posts on a given topic” – shameless plug for a guy who thinks a labor market that exchanges 10M people a year minus ten between adjacent states is the same as two countries that exchange ten persons (since net they both equal 10 people exchanged). A polemicist, then again most e-con-amists are.

    John Cochrane’s trite essay on regulation was timely–in the 1940s. Since then it’s well known that most big businesses actually like government regulation–the red tape keeps out their competitors. The ITC in DC is set up expressly to ‘level the playing field’ for regulations and keep out cheap imports.

    Sumner: “Don’t forget that I also do posts at Econlog.” – I forget, since I’ve been banned from posting there. The moderator is so afraid of me that she banned my email address so even if I use another name the email is recognized. Dangerous minds…

  6. Gravatar of bill bill
    8. August 2015 at 07:09

    The comparison may be meaningless, but Krugman says it’s meaningful because of the financial crisis. So at the very least, it should have meaning for him.

  7. Gravatar of Dan W. Dan W.
    8. August 2015 at 07:19

    The incontrovertible law of real estate is “location, location, location”. If monetary easing increases the price of real estate in the Arizona or California desert it is likely monetary tightening will have the inverse effect. The question then becomes whether it is ever a wise decision to buy a house in the desert with a highly leveraged loan. More importantly, is it a wise decision to lend money to someone to buy a house in the desert with little or no equity?

  8. Gravatar of Ray Lopez Ray Lopez
    8. August 2015 at 07:54

    @Dan W. – aside from the issue of money neutrality –let’s leave that aside for now– the answer to your question (“More importantly, is it a wise decision to lend money to someone to buy a house in the desert with little or no equity?”) from Sumner-endorsed K. Erdmann seems to be ‘of course it’s wise, since there’s never a real estate bubble!’. Yes, land, they don’t make it anymore, even in the vast expanses of the American southwest desert [sarcasm].

  9. Gravatar of Riccardo Riccardo
    8. August 2015 at 08:13

    While I love your blog and I’ve learned a lot by reading your posts over the past two years, I’m reminded that even our heroes (you, in this case) can fail us. Example: So I read Cochrane’s post about dangers of the regulatory state per your high recommendation, but he’s not really very convincing for two reasons: 1) mainly, he proposes no meaningful alternatives for managing externalities (and, yes, they do need managing in a civil society). It’s all well and good to bemoan the dangers of unaccountable over regulation, but ok, then what else should we do? I read his whole piece but missed any constructive suggestions (other than his implied “vote Republican” – as if they are less prone to abuse!). 2) While I agree regulatory agencies can run amok if not managed and held accountable, I’m not persuaded that this is something new nor that there’s something scarier now about our present situation. In fact, he himself states “it was ever thus” (but then goes on to say now is worse). Which brings me to my conclusion: Cochrane is arguing partisan politics not policy. And it makes me sad that this kind of thing impresses you. But fair enough, I’m still grateful for all the many, many good things you offer 🙂

  10. Gravatar of Benoit Essiambre Benoit Essiambre
    8. August 2015 at 08:30

    “But the problem for monetary theory is that, without a real-value equivalent to assign to money, the value of money in our macroeconomic models became theoretically indeterminate.”

    This seems to be the crux of it. Help this non-economist figure out the limits and ramifications of this. It kind of matches some ideas I’ve had but I’m not sure.

    My impression is that this is mostly true when the amount of money held goes above the minimum liquidity useful to pay for day to day stuff.

    When people hold about just the amount of money they are going to need for transactions, this money gets its worth based on the utility inherent in liquidity. The fact that governments only accept money for tax payments helps underpin this demand for liquidity and raises the minimum worth people give to money. Plus there are network effects. If you are forced to use this medium for tax payments, you might as well use it for other things and not have to deal with exchange transactions with a second currency.

    If money goes beyond that, if people (and banks and businesses) start accumulating money above what is useful as liquidity, if they start using it as a store of value that displaces savings that would have been in the form of private market stores of value such as stocks, bonds, or just stockpiles of stuff then money’s value becomes indeterminate (and likely susceptible to volatility). Money’s value becomes more like a guess of what (and when) other people are going to be willing to trade it for, a guess that is not anchored to much. If a shock causes people to want less money suddenly and there has been a large idle excess accumulation of it above what is necessary for liquidity to be useful, the greater the stockpile that suddenly wants to move, the more difficult it is going to be for central banks to control money’s value, there might be spikes in inflation. This can happen rather quickly as money has no term length to control how fast in can accelerate.

    The conclusion to this would be that for money’s value to remain sufficiently controllable, central banks need to not allow it to become too good at retaining value so that people don’t hoard it and excess reserves don’t accumulate and replace savings that should be based on private market stores of value.

    Central banks need to make sure money devalues fast enough so that people and banks don’t have much incentives to hoard it and create what I would describe as a money bubble, a form of paper wealth that is not sufficiently tied to economic activity (the bubble metaphor not only carries the sense of being over-inflated but it also carries the sense of being inflated with air instead of something more substantial, fiat is intrinsically a very thin economic substance ).

    I get the sense that the choice between something like NGDPLT, PLT or even just higher inflation targets may not matter much as long as money is always kept devaluing fast enough and stably and predictably enough to be a useful, controllable form of liquidity. The markets and central banks can probably adapt to the exact target.

  11. Gravatar of ChargerCarl ChargerCarl
    8. August 2015 at 11:08

    That Erdmann post is amazing. Thanks for sharing.

  12. Gravatar of ssumner ssumner
    8. August 2015 at 11:29

    Ray, Did I say they could buy houses? You’ve never heard of renting? Or do you think all illegals live on the street? You obviously learned nothing from reading Kevin’s post, probably didn’t even understand it.

    The moderator at Econlog has very good taste.

    Riccardo, I think you misread Cochrane. Here’s what he actually says:

    “A clean environment is important. Pollution is a clear externality. We can also regard it as a Nash equilibrium. Each competitor in an industry is happy to pay the extra money to produce cleanly if all his or her competitors do so.

    But the modern EPA violates just about every one of my suggested bullet points for preserving rule of law in the regulatory bureaucracy, and is ripe for political misuse.”

    That’s not at all what you imply in your comment. Cochrane wants clear rules—pollution taxes would be a good example of how each polluter could “pay extra”–not discretionary regulations. I thought that was clear when I read his post.

    The vast majority of the regulations he discusses have nothing to do with externalities, and are not needed at all. But again, he indicates that if we are going to have regulations, it should be based on clear rules, not bureaucratic discretion. On the other hand the focus of the post is clearly on problems with regulation, so maybe you wrongly assumed he had no solutions.

    BTW, I doubt that voting Republican would help.

    But I appreciate your following the blog, even if we disagree about Cochrane.

    Benoit, Excellent comment, that sounds just about right.

    ChargerCarl, Yes, Kevin is always worth reading.

  13. Gravatar of Tom Brown Tom Brown
    8. August 2015 at 11:37

    Scott, you’ll be relieved to know that this guy’s figured it all out and is here to set all of you straight:

    “Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy. Because of this, economists have nothing to offer in the way of a scientifically founded advice.”

    Would you pass the word along to Paul Romer? I’m sure he’ll be interested to know, but he doesn’t allow comments.


  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. August 2015 at 13:17

    Thanks for the link.

    Here’s the last in a three part series on fiscal and monetary policy interaction in the Age of ZIRP.

    How large has the fiscal multiplier been according to VAR estimates? Read it and find out.

  15. Gravatar of Ray Lopez Ray Lopez
    8. August 2015 at 15:45

    @sumner – I see, thanks. Rent by illegal aliens is the driver for the 00s real estate boom? Never mind illegals typically room several families to a house. OK, point taken. No I did not read Erdmann’s fifty part series since the entire premise is data mining (in a bad way) ludicrous. Reminds me of an economists’ ludicrous paper that ‘adjusted for quality’ refrigeration was no big deal since it was roughly the same as iceboxes.

    @Mark A. Sadowski – you enjoy throwing around big words in your paper. “Choleskey decomposition”, wow. Is that an orthogonal polynomial Mark?

    More seriously however, your bogus data mining relies on this flawed premise: “This ordering assumes that government consumption and investment spending is not affected contemporaneously by shocks originating in other sectors of the economy, and that changes in government consumption and investment spending, unlike changes in net tax revenue, are largely unrelated to the business cycle.” Wow. I suppose you lived in a cave and completely did not hear about the “fiscal cliff” of 2013? If you read this blog you would know this issue was, says our fearless leader, some sort of test showing Paul Krugman was wrong (Krugman simply says he overestimated how much the government cut back spending, and indeed, the second Google link on this topic has a Jan 3, 2013 CNN headline that reads: ‘Obama signs bill warding off fiscal cliff’, so Krugman is probably right, albeit he gets a bit of egg on his face).

  16. Gravatar of benjamin cole benjamin cole
    8. August 2015 at 16:00

    Lots of great blogging…and yet—the macroeconomic profession remains obsessed with interest rates and inflation. Note how little discussion there is about interest on excess reserves or the use of QE.

    The discussions of the Taylor Rule or the NeoFisherian seances occur in a vacuum in which there is no IOER or QE policy tool to be deployed, for example.

    If the Neofisherians are correct, should the Fed hold interest rates very low and go to QE hard and heavy?

  17. Gravatar of Andrew_FL Andrew_FL
    8. August 2015 at 16:30

    “The” Price Level was always a subjective, imaginary construct. Gold convertibility doesn’t change that, it’s just a practical limitation on the behavior of any given measure of “the” price level in the medium to long term.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. August 2015 at 16:39

    Ray Lopez,
    “Wow. I suppose you lived in a cave and completely did not hear about the “fiscal cliff” of 2013?”

    The ordering of the variables is conventional. (I’m also fairly certain that you do not really understand the passage you just quoted.) Moreover, if you read the rest of the post it talks at length about the fiscal cliff of 2013.

    And the fact that you’re talking about spending rather than taxes indicates you’re off in lala land again. Try just once to figure out what it is that you are arguing about.

  19. Gravatar of Jeff Jeff
    8. August 2015 at 17:24

    The elephant in the room is Houston, where the lack of zoning restrictions allowed supply to respond to rising demand. Many, many fine houses were built there during the boom, and as a result, prices did not go up much. In fact, every metro area that saw big home price increases during the boom had substantial restrictions that made it hard for developers to respond by building more houses. This was the culmination of two decades of “smart growth” land use policies, which basically amounted to “keep the riffraff out of my area.”

    The idea that none of the speculative demand for houses in 2005-2007 came from would-be flippers is nuts. Just go read the contemporaneous postings at Calculated Risk and some of the blogs they linked to back then. Just because you weren’t paying attention doesn’t mean it wasn’t happening. Look at plots of the ratio of median home price to median household income. The bubble is obvious.

  20. Gravatar of ssumner ssumner
    8. August 2015 at 17:32

    Jeff, Not sure how your comment relates to my post, perhaps you misunderstood what you read. Did I ever say there was no speculation?

    And of course the existence of speculation has no bearing on the question of whether there was a bubble.

  21. Gravatar of TravisV TravisV
    8. August 2015 at 19:33

    Why is China so reluctant to devalue? Could someone please provide a more thorough explanation than this?

    “This relief is blocked – for now – because it would risk other nasty side-effects. Chinese companies have $1.2 trillion of US denominated debt. A yuan devaluation would anger Washington and risk a beggar-thy-neighbour currency war across Asia, with lethal deflationary effects.”

    – Ambrose Evans-Pritchard

  22. Gravatar of benjamin cole benjamin cole
    8. August 2015 at 20:14

    Travis—huh? The People’s Bank of China revs up the presses and devalues the yuan, and then the Fed revs up the presses in response and that leads to a “lethal” deflation?


    PS I have to confess I enjoy the use of the word “lethal” in connection with deflation. That provides a nice counter-balance to the hyperinflationary holocaust scaremongering we usually hear.

  23. Gravatar of Tom Brown Tom Brown
    8. August 2015 at 20:35

    ben, what about the steady 2% per year inflation Armageddon?

  24. Gravatar of Ray Lopez Ray Lopez
    8. August 2015 at 20:54

    @Mark A. Sadowski – I not only read and understood your post, I understood the flaws in it. Let me be more direct: it’s B.S. Keynesian theory correctly states a tax cut is equivalent to a government spending increase. Whether or not your model accounts for this (and I bet it does not, another flaw) it remains that this conclusion is bogus: “Thus, in the Age of ZIRP, the monetary offset of fiscal policy has effectively meant that the fiscal multiplier has not only been zero, it has been negative.”

    It’s been demonstrated by many economists that a “negative” multiplier is almost impossible. Granted even if government spending is 99% wasteful, and a mere transfer payment from Peter to Paul, there is a 1% residual that’s positive. A negative multiplier means your model is probably wrong, as it assumes different classes of citizens with different marginal propensities to consume, an assumption that may be wrong. It assumes that some people will set aside more money than the money that the government is spending, which only the most diehard 80s style Ratex fanatic would believe. Examine your priors please. Here is a resource and there are others:

    A question to ponder is how your model came up with a negative multiplier, given the assumptions in it. It’s like a negative root in a quadratic equation, it should be treated in a real world answer with caution. But somehow I doubt ‘caution’ is in your vocabulary.

  25. Gravatar of LC LC
    8. August 2015 at 22:15

    Travis V:

    Currency valuation is a political topic her in China. The government wants RMB in IMF SDR. A devaluation on the eve of IMF decision will be seen as counterproductive. There may be some economic benefits for SDR inclusion, e.g. greater freedom for Chinese state firms to operate overseas, but I am dubious. Of course IMF dragging its feet on this (latest rumor is decision could be delayed until September) is hurting even more. Another thing to ponder is if Chinese government is so eager to join IMF, then why set up AIIB?

  26. Gravatar of LC LC
    8. August 2015 at 22:20

    I should add the IMF could delay its decision until September 2016.

  27. Gravatar of Kevin Erdmann Kevin Erdmann
    8. August 2015 at 22:33

    Carl & Scott- thanks. I had a more conventional view of interest rates and the housing market before 2012. Taking my finance frame of reference and applying the market monetarist POV, much of which I picked up from Scott, which turned many things on their heads and made everything make much more sense has been invigorating, more so because every time I go back to review the data, it seems to directly oppose the conventional narrative in a way that MM can explain.

    Jeff, your point about Houston fits the POV of my post Scott linked to. And speculation is always more active when prices are volatile, regardless of their relationship to intrinsic value.

  28. Gravatar of TravisV TravisV
    9. August 2015 at 05:46

    Benjamin Cole, good point. The idea that deflation would result is strange.

    James Alexander (James in London?) answered my question about China above:

    “Because a devaluation is an admission of failure. And China’s Communist Party cannot fail. The Party is omnipotent. RGDP growth is a minimum of 7% and cannot be anything lower.

    Seriously, NGDP growth has recently halved from around 15% to 8% or lower. It just must be causing immense strains and stresses. They should devalue. However, that US$ debt will be a burden. The central bank’s US$ assets may have to be mobilised to help out.”

  29. Gravatar of TravisV TravisV
    9. August 2015 at 05:48

    LC, thanks, interesting. I didn’t know about IMF SDR.

  30. Gravatar of ssumner ssumner
    9. August 2015 at 07:01

    Ben, I’m with you, I don’t see how that’s deflationary.

    Ray, You aren’t even addressing Mark’s claim, indeed I doubt you even understand it.

    LC, Very interesting point, I did not know that.

    Thanks Kevin.

  31. Gravatar of Willy2 Willy2
    9. August 2015 at 07:20

    I see a number of reasons why the housing bubble here in the US popped:
    – House prices doubled between 1995 and 2006 while at the same time wages did not double.
    – Median houshold income here in the US remained flat between 2000 and 2007. Keep in mind: that same median Household income kept rising from 1965 up to the year 2000.
    – Short term US interest rates rose from 1% in 2003 up to 5.25% in 2006. A LOT OF subprime mortgages were financed with these short term rates and those mortages saw their mortgage payments go up at the same at the same rate as those rates rose.
    – Oil prices rose from $ 20 in 2001 to over $ 140 in mid 2008. Since the EUR/USD doubled from ~ 0.80 to 1.60 in the same timeframe oil-price inflation in the Eurozone was only 50% of what it was here in the US.

    In one sentence: US housing simply became unaffordable.

    Rents went by ~30% but the price of housing went up by ~ 110%. It meant that real estate investors who bought houses for the rental income saw their bills for real estate (think: taxation) go up faster than the income (=rents).

  32. Gravatar of Don Geddis Don Geddis
    9. August 2015 at 09:50

    @Ray Lopez: “A negative multiplier … assumes different classes of citizens with different marginal propensities to consume … It assumes that some people will set aside more money than the money that the government is spending

    No, it doesn’t.

    All this time you spend on this blog, and even now you still don’t have the slightest clue about monetary offset?

    Here is a resource

    You need some help with basic logic. A statement that “if […MPC…], then the fiscal multiplier could be negative” is completely different than your statement that “if the fiscal multiplier is negative, then […MPC…]”. In a logical implication, the order matters! Try to pay attention.

    Hint: in your linked paper, what is their assumption about the monetary policy reaction function? In fact, is monetary policy even mentioned at all in the paper?

  33. Gravatar of Ray Lopez Ray Lopez
    9. August 2015 at 10:42

    @willy2 – but K. Erdmann, recommended by Sumner, thinks there’s no housing bubble at all! It’s all a mirage…

    @Don Geddis- you’re even more incoherent than usual. The paper I cited actually supports how you can have a negative fiscal multiplier. This is relevant since Sadowski says in his linked paper: “Thus, in the Age of ZIRP, the monetary offset of fiscal policy has effectively meant that the fiscal multiplier has not only been zero, it has been negative.” which I find implausible (but not impossible). Got it now? It’s not rocket science, though Sadowski tries to make it look like such for his own vested interests, anymore than it’s not rocket science to understand Ben S. Bernanke’s 2003 paper that said monetarism has between 3.2% to 13.2% effect out of 100% on the economy (that is, almost no effect, albeit statistically significant). Got it now?

  34. Gravatar of Ray Lopez Ray Lopez
    9. August 2015 at 10:46

    @Don Geddis (again) – though it’s hard to see what you’re whining about, just to make my last point even more clear: Sadowski is claiming there’s a negative fiscal multiplier. That’s the disputed fact in debate. That Sadowski gives a ‘reason’ for this fact as “monetary offset” (which I don’t believe in) does not negate the fact that Sadowski feels there’s a negative fiscal multiplier. Got it now? Heaven’s no, that’s a compound sentence and Don, like in a simple ball-on-ball shot in billiards, can’t follow more than one thought leading into another at any one time.

  35. Gravatar of Don Geddis Don Geddis
    9. August 2015 at 12:31

    @Ray Lopez: You persist in incorrectly assuming that any disagreement must be a misunderstanding in others … when the truth is typically the opposite.

    Yes, I know Sadowski claimed evidence of a negative fiscal multiplier. Yes, I know your linked paper provided “support” for a possible negative fiscal multiplier. What you don’t seem to understand is, that doesn’t mean that your paper and Sadowski agree with or support each other! It isn’t just the conclusion that matters, it’s the reasoning leading to the conclusion.

    To be specific (again), what is mistaken is your claim, namely: “A negative multiplier means … it assumes different classes of citizens with different marginal propensities to consume … It assumes that some people will set aside more money than the money that the government is spending” That claim, of yours, is supported neither by the paper you linked to, nor by Sadowski’s posts. You just pulled it out of your ass.

    (To be fair, you probably think that’s what your paper said, but as I already told you, you’ve failed elementary logic. You read a claim “A->B”, you accidentally claimed “B->A” instead, and now you can’t seem to understand the difference.)

  36. Gravatar of Willy2 Willy2
    9. August 2015 at 13:21

    – One also has to take demographic developments into account. Those developments were from 1945 up to 2005 favourable for US housing but turned unfavourable after 2005.

    Harry S. Dent
    did some TRULY excellent work on the relationship between demographics and the US economy (e.g. housing).

    – “Tight monetary policies killed the housing bubble”. Sheer nonsense. It the “monetary policy” of the 320 million US citizens put together that killed the housing bubble.
    – The US never had, since 1990, a Current Account Surplus but ran Deficits instead. That means that foreigners have subsidized the US Housing bubble, especially because, up to 2008, US budget deficits were (much) smaller than the CA Deficits.

  37. Gravatar of Kevin Erdmann Kevin Erdmann
    9. August 2015 at 14:16

    Willy2, why did rent inflation skyrocket when homebuilding collapsed in 2006, if it was in reaction to falling demand?

    And, US foreign income is always much higher than foreign income from US assets. If foreigners hadn’t been piling money into the US to try to keep up, our net foreign income would be mindboggling.

  38. Gravatar of Ray Lopez Ray Lopez
    9. August 2015 at 19:15

    @Don Geddis: who quotes me as saying: “A negative multiplier means … it assumes different classes of citizens with different marginal propensities to consume … It assumes that some people will set aside more money than the money that the government is spending” then says: “That claim, of yours, is [1] supported neither by the paper you linked to, [2] nor by Sadowski’s posts. [3] You just pulled it out of your ass.” – no Don, you’re just making a fool out of yourself again (old story). [1] true, but implied, that’s what negative fiscal multiplier is, [2] true, but implied, [3] false, it’s standard in the field to explain why there’s a negative fiscal multiplier. Just Google it Don.

  39. Gravatar of James Alexander James Alexander
    9. August 2015 at 21:59

    Willy2: “In one sentence: US housing simply became unaffordable.”

    Yogi Berra: “Nobody goes there anymore. It’s too crowded.”

  40. Gravatar of Willy2 Willy2
    9. August 2015 at 22:25

    – People went back to renting instead of buying because renting was more affordable. Rents didn’t go up that much as house prices in the timeframe 1995 – 2006.
    – Later (after 2008) banks became more cautious when it came to lending money for mortgages. More people were simply forced to rent and more people were less willing to buy a home.

    As a result of rising gasoline prices after 2001 people turned away from gas guzzling cars.
    “Chairman and CEO Bill Ford said the cuts would be painful, but are necessary in order to respond to customer demands. He admitted that Ford had been hurt by the customer shift away from large-size SUVs, leaving Ford with too much capacity of the large, less fuel-efficient vehicles.”


    Your reply shows that you don’t understand why foreigners are buying USD denominated bonds (e.g. T-bonds & Fannie Mae & Freddie Mac paper).

    “If foreigners hadn’t been piling money into the US to try to keep up, …….. “. Please explain why foreigners should “try to keep up”.

  41. Gravatar of Willy2 Willy2
    9. August 2015 at 22:26

    In other words: Rising oil prices played a very important role in the diminishing spending power of the US consumer.

  42. Gravatar of ssumner ssumner
    10. August 2015 at 07:12

    Willy2. You said:

    “In one sentence: US housing simply became unaffordable.”

    Yes, and no one goes there anymore, it’s too crowded.

    James, Yikes, great minds think alike.

  43. Gravatar of Jeff Jeff
    11. August 2015 at 11:21

    Scott, at least some of the demand for housing during the bubble was by flippers and other buyers who thought prices would keep rising. When prices started going down and people saw that buying a house was not always a great investment, many decided to rent rather than take on the risk of home ownership. That explains why rents started taking off as housing prices crashed.

    During the boom, many people bought houses they couldn’t actually afford, but they did so expecting that rising prices would allow them to take money out by refinancing and then using some of the proceeds to pay the new mortgage payments until they sold a few years later. This scheme worked wonders for a lot of people during the 15 years before 2008. When enough people think this way, you have a bubble.

    In the suburbs of DC, people who bought $300K homes in the mid-90’s became millionaires without lifting a finger, at least on paper. Those who didn’t sell and retire to less costly areas took money out by refinancing. Almost everyone was doing this. But the vast majority of homeowners around here in 2007 could not have afforded to buy the homes they lived in at 2007 prices, so I was pretty sure as early as 2005 that, as Herb Stein said, something that can’t go on forever won’t.

    Renters in the mid-2000’s saw the appreciation and were kicking themselves for not buying. Many of them, including my own daughter (against my advice), bought in right at the top. It took her and her husband five years of doubling up on their mortgage payments to get out of negative equity on that townhouse.

    When people are buying only because they think prices are going to continue to go up, that’s a bubble. You can argue that this is irrational, that if everyone expected rising prices then prices would immediately jump to the ultimate equilibrium level, but that’s not what happened in the boom. Prices went up by a lot year after year, and that made believers out of a lot of people.

    It was a bubble. I lived in the heart of it and had personal reasons to be paying attention at the time. It was aided and abetted by a lot of fraud, but mostly fueled by buyers’ expectations that prices would keep going up.

    People aren’t always rational. Even the head of Citibank, who you might think was pretty sophisticated on matters of finance, said that as long as the music was playing, you had to keep dancing. Today that sounds foolish, but back then it was the conventional wisdom.

    It was a bubble. Get over it.

  44. Gravatar of ssumner ssumner
    11. August 2015 at 11:43

    Jeff, I have many many posts explaining why you are wrong. If you want to address some of the specific arguments I made, I’d be glad to respond. If not, if you want to act like a jerk, I’ll just ignore you.

    “Get over it” doesn’t explain why house prices didn’t crash after similar run ups, with similar speculation, in many other countries like Australia and Canada.

  45. Gravatar of Kevin Erdmann Kevin Erdmann
    11. August 2015 at 12:42

    Jeff, your daughter will almost certainly have higher total returns from the house she bought at the top of the “bubble” than she would have earned from, say, as 30 year TIPS bond bought at the same time. None of the drop in value of homes came from declining expected cash flows, which would have been the case if it had been a bubble, which means that the fall in price has simply meant a rise in market yields. Owning that home is like owning a very illiquid bond. The only reason the average home hasn’t outperformed TIPS bonds already in the 9 years since the peak is because we destroyed the liquidity in the housing market but the TIPS market is still liquid, so TIPS bonds have capital gains related to the yield change. But, even with that, the average home bought in 2006 has had a positive nominal return (rent, net of expenses and depreciation) of nearly 2% since then, even with the capital losses.

    We had a bust, not a bubble….Get over it. 🙂

  46. Gravatar of Jeff Jeff
    11. August 2015 at 14:21

    Perhaps we’re talking at cross purposes here. My definition of a bubble is that when prices go up because people think they’ll go up even more in the future, that’s a bubble. As I said above, I lived thru this in Northern Virginia and I saw that happening here. I was not alone; look at the Calculated Risk website postings from back then or the stuff Dean Baker was posting. I don’t agree with most of his politics, but he did see the housing bust coming.

    Scott, you ask why there was a housing bust here but not in Australia or Canada. I don’t know enough about their real estate markets to answer that. Perhaps you or Kevin can enlighten me. But if you are correct that it was all monetary policy, then why didn’t Houston housing prices crash? I say it’s because the lack of supply restrictions kept the bubble from inflating there. Do you disagree? I don’t think Kevin does.

    I do agree with you that the housing crash did not cause the recession. I also agree with you that monetary policy had little to do with the housing boom. Where we disagree is whether or not the housing “bust”, to use Kevin’s term, was foreseeable. I contend that it was, and that easier money would not have prevented it.

    Kevin says real rents went up a lot and that justified the price increases. He notes that you can only get excess rent inflation if you have “pretty severe supply constraints”, i.e., not in Houston. But in the long run markets tend to route around regulatory constraints: Texas grows and California does not. The metro areas that saw the largest price increases in the boom also see the biggest declines in the bust. The excess rent inflation doesn’t last.

    At the theoretical level I think Kevin and I are mostly in agreement. But from reading his blog post, it is not clear to me how he is measuring the real rate of return to home ownership. He mentions the Shelter CPI and data from Flow of Funds and BEA tables without specifying which particular series he is using. It can make a big difference: see this chart comparing several measures of housing inflation. I think something like the Shiller repeat sales index is the best measure, but it doesn’t go back very far. But that means we don’t actually have very good data and so there are some questions we really can’t address.

    If you look at Kevin’s numbers, he says, for example, that a change in real rent yield from 4 percent to 2.4 percent increases the value of a home by 67 percent. But he’s implicitly assuming that he has a very accurate measure of a home’s real rent yield, and I’m not at all sure that he does. Without knowing a lot more about the data series he’s basing this on, I just can’t say. Without a sense of how much measurement error there could be in his numbers I’m reluctant to put much weight on his arguments from them. To make a convincing argument about the difference between 4 percent and 2.4 percent, you’re going to have to show me that your data is really precise.

    And finally, I should tell Kevin that my daughter is no longer living in that townhouse. She and her husband worked very hard to fix it up (it was a dump) and did a lot of work on it themselves. A year ago they bought a single family home a couple of miles away and they are renting out the townhouse. The market value of the townhouse, even after all their work, is still a bit below what they paid for it. But they’re doing OK and have produced a couple of most excellent grandchildren, so I’m not complaining.

  47. Gravatar of Kevin Erdmann Kevin Erdmann
    11. August 2015 at 17:40

    Jeff, sometimes I resort to cpi rent inflation and Case Shiller indexes. But for long term national data I like to use aggregate household real estate market values from the Flow of Funds data and housing expenditure data from BEA table 7.12 (I think. That’s off the top of my head.) Net rent after capital consumption + net interest / FoF owner occupied home values is my preferred measure of what I call home yields.

    The higher rent inflation of the constricted cities can cause more price volatility because the expected rent inflation affects the intrinsic value of the home by lowering the required cash yield, similar to a tips bond yield being lower than a nominal bond. Plus, the higher price/rent ratios in the constricted cities would make their home markets more susceptible to credit market frictions.
    You’re right that rent in the free areas remains moderate, but in the few large cities with high productivity advantages, rents can keep going up. That’s why there are complaints about rich people moving in and ruining NYC and sf. High income workers can benefit from the geographically related productivity. You’re probably right that eventually it must revert. That will happen when the cities lose their geographic advantage. The higher housing costs will probably accelerate that process, much like unionization did for Detroit. Syphoning rents works until there are no rents. The funny thing is, it could be that little of this is self interested rent seeking.

  48. Gravatar of Jeff Jeff
    11. August 2015 at 20:04

    Kevin, if people are willing to pay more for a house because they expect higher rent inflation, is that not the same thing as saying they will pay more because they expect higher house prices? That’s my definition of a bubble.

    It also raises the question of why anyone would expect higher rent inflation. Why don’t rents immediately jump to the equilibrium higher level? I suspect your answer is going to be that house prices don’t jump immediately because mortgage lenders won’t go along, but from Scott’s point of view, that’s just moving the locus of irrationality to the lenders.

  49. Gravatar of Kevin Erdmann Kevin Erdmann
    11. August 2015 at 22:07

    It’s a bubble even if rents actually go up enough to justify the price?

    Rents don’t jump immediately because the demand for living in the problem cities builds slowly over time. Home prices were never very far from the intrinsic value (until 2007).

    National rent inflation is currently 3% and, if you happen to be able to get a mortgage, you can borrow 30 yr fixed at about 4% while BEA net yield from rent after costs and depreciation averages about 3 1/2%. Before 2007 there was never such a spread between nominal mortgage rates and home yields+rent inflation.

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