Whither the movie theatre?

Box office takes are down around the world. Marginal revolution wonders why. My guess is that it has nothing to do with the quality of films or downloads, but is because of widescreen TVs and DVD players. Seeing movies at home is just much better now than it used to be.

Interest rates and house prices

Another great post from CR (on Angry Bear) about the housing bubble. It's not obvious if high or low interest rates should have any impact on the price of housing. On the one hand, if interest rates are low, then the present value of future rents that house would producde are higher, so the value of the house should go up. On the other hand, does your broker's margin rates really impact whether you think Amazon.com is worth buying at $300 or not?

The post notes that historically, house prices and interest rates have been fairly unlinked, but household income and prices correlate strongly. If households are only looking at their ability to make monthly payments, then they are becoming seriously over leveraged. This means that they are more likely to foreclose on their home if their personal situations deteriorate and they owe more money on the house than it is worth.

So, if banks experience a larger than expected number of defaults on their home loans, who will pay? I'm guessing the tax payers via Freddie Mac/Fannie Mae. (Update It seems that MA, one of the most frothy bubble markets, has seen defaults increase).

Update winterspeak reader JT writes in arguing that

It's true that defaults have increased this year in Massachusetts, but I expect that the data is a bit difficult to read because of the massive increase in bankruptcies due to the change in bankruptcy law. (The new rules, which make it harder for people to protect certain income and property, were passed with a six month period until they phase in.)

See here, for instance:
http://volokh.com/archives/archive_2005_06_19-2005_06_25.shtml#1119645927

Bankruptcy filings jumped 60% in March and April compared to January and February, and almost surely as a result of the bankruptcy law and people trying to beat the changes. This makes it hard to rely on foreclosure stats, due to this confounding factor.

That's a great point and I think he's right. I don't think this wave of foreclosure is not caused by overleveraged homeowners because interest rates have not moved yet. It also suggests that bankrupcy fraud was more widespread than some may have thought.

The current account deficit

I agree with most of what Kash says on why Asia is lending money to the US. Kash says that it is unlikely Asia is sending capital to the US because Asian countries are corrupt (and therefore high risk) because 1) it's central banks that are doing most of the lending, not individuals, and 2) investment in Asia is, if anything, too high, which does not fit the poor risk story. He ends by saying

Note that the two things that make this pattern possible right now are (1) the fact that the US is living far beyond its means, and borrowing the difference (both at the private and governmental levels); and (2) the fact that households in developing countries like China are saving rather than spending their income.

Personally, I think that 1) is a rational consequence to 2). People in the US are living beyond their means because they are being given free money from Asia. Once the free money stops, the extra spending will stop. While the free money flows, it would be foolish not to take it. Unfortunately, much of this free money spending is going into realestate, so people are just bidding up the price of assets, not buying actual new stuff.

I think people in Asia are saving too much because their economies are managed for export. This means that resources are transfered away from imports (and consumption) to export (and savings/investment). The lesson learned from Japan etc. is that you need to export to grow rich, and even developed economies like the US still share that same mercantile impulse. People in the US are worried that we import more than we export (trade deficit) so is it surprising the Asian governments are worried about that too? Asian currency manipulation has forever been openly targetted to aid exporters to the detriment of importers and consumers.

I'm not sure what it will take to encourage Asian countries to begin treating exports and importers equally, but I think it is that policy bias that is transfering wealth from Asia to the US via Asian central banks.

Why of why can't we have a better Paul Krugman?

Marginal Revolution notes that with his China bashing, once liberal economist Paul Krugman has lost all semblance of liberal decency and economic literacy.

What really upset me about Krugman's column is not the bizarre economics but the illiberal politics. In the last twenty years China's economic growth has lifted hundreds of millions of people out of poverty and nearly unspeakable deprivation. China's abandonment of communism is one of the great humanitarian events of all time. And what does Krugman have to say about this improvement in well being? 'Watch out. Now is the time to panic. Their gain is your loss.'

I so eagerly await Brad's commentary on this that I've supplied him the title for his post.

Update So Brad finally writes about Paul, but I cannot for the life of me figure out what he's saying. If you can parse "Paul Krugman Says Control of Possibly Very Scarce Natural Resources Is More Important than Opulence Or does he? As I read Paul, he says that if we did not need Chinese help on North Korea and if we were not very vulnerable to a cut-off of capital inflows, then he would argue against allowing the Chinese bid for Unocal on the grounds that there are possible future states of the world in which control of oil flows will turn out to be very important indeed. But we do need Chinese help on North Korea, and we are very vulnerable to a cut-off of capital inflows" you are a better man than I.

The Limits of Arbitrage

One key insight from the Behavioral school of economics is that arbitrage, that powerful force which eliminates all free lunches, is quite limited in practise. For example, suppose you felt Amazon.com was overvalued in 1999. To try to capitalize on that bet, you would have 1) had to short the stock (easy), and 2) made the margin calls as it doubled between 99-2000, and 3) hung on until it reached its nadir in 2002. Tricky stuff.

Similarly, Bryan Caplan wonders how one would arbitrage the current bubble in real estate prices.

But that gets me thinking. What would I actually do if I knew for sure that my house was going to plummet in value one year from today? My ideal solution would be to sell my house to someone, rent it from them for a year, then buy it back. But that would be very hard to arrange. In practice, I'd have to sell, rent whatever's available for a year, then use my nest egg to buy a comparable (or better home), pocketing the difference.

I suppose one could take out a large, fixed, reverse mortgage against the house -- essentially selling it to the bank and renting it back from them, but I'm not sure how you would unwind the position after prices decreased.

If you are a renter the answer is easy -- continue to rent while renting is so cheap.

Finally, I don't buy the argument that population explains the housing bubble. The population of Massachusetts *shrunk* last year, but housing appreciate in Boston is the highest in the nation.

What is victory?

Wretchard has an excellent post on what constitutes victory for a guerilla force, and by extension, what constitutes defeat.

Seizing state power over a definite territory is the explicit objective of nearly every guerilla armed force in the world today: if they can achieve that, they win. If they cannot achieve that and have no realistic prospect of ever achieving that, they are defeated, however long they may continue to exist.

Guerilla leaders themselves know this and invariably attempt to create a state-in-waiting in the course of their campaign based on an armed force, a united front of allies willing to support the guerilla's political objectives and a hard leadership core in firm control of both...

In that context, the battlefield victories of the US Armed Forces and its coalition allies are not the empty triumphs the press sometimes represents them to be but expressions of the complete strategic bankruptcy of the insurgency. No national united front; no united hard core of leadership; no victorious armed force. This in addition to no territory and increasingly, no money and what is there left? Well there is the ability to kill civilians and to avoid being totally exterminated by the Coalition; but that is not insurgent victory nor even the prospect of victory.

Read the whole thing.

Mob blogging

One of my most favorite law school profs (U Chicago) has a mob blog on the recent Grokster vs Brand X ruling. Picker has put together quite the star studded cast too including Doug Lichtman and Jessica Litman.

Eminent Domain

In a poorly considered decision, the Supreme Court ruled that local town officials know best about how to develop a community and can seize and re-zone residential property as they see fit.

John Paul Stevens, Anthony Kennedy, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer thought this was a good idea. Sandra Day O'Conner, William H. Rehnquist, Antonin Scalia and Clarence Thomas dissented.

The hold-out problem in zoning is a real one, but I think the regulatory capture problem is worse. I guess the majority felt otherwise.

Freedom and Happiness

I really like this post on 2Blowhards. The question:

Is there any way around these multiple forms of self-subversion? The free market requires the assent of its participants. What if many of them -- because of conditions created by the free market itself -- just don't feel like giving their assent?

He also talks about how choices confuse people and make them unhappy, and how people care about relative wealth, not absolute wealth, and so are not made more happy by making more money.

My main response to this is to question why anyone thinks human beings are programmed to be happy. Surely all of these observations reveal that no matter what we have, we continue to want to out-do our neighbours. There is a reason that major religeons dissuade envy and jealousy as vices -- people are envious and jealous and do destructive things as a consequence of these emotions. The "too many choices" or "too much money" crowd seems to beleive that if you just took choice, or money, away then people would be happy, but in fact our natures are envious and greedy and we would just find other things to be unhappy, envious and greedy about.

So the question becomes, given that people are and always will be unhappy, envious, and greedy, how should those emotions be channeled? The free-market takes those energies and puts them towards making new goods and services for others. This takes our very "zero-sum" emotions and turns them to "non-zero-sum" ends to the benefit of us all by any measure. We can either be unhappy because we have too many cereal brands to choose from, or we can be unhappy because our neighbours have something that we think they don't deserve. I know my preference.

Lastly, 2Blowhards ask what's to keep free-markets alive if people find them icky. The answer is not too much, maybe competition between countries. But as we've seen in Europe, this competition more often takes the form of sclerotic economies trying to freeze free economies as often as sclerotic economies freeing themselves. I don't think economies are particularly free now nor do I think there is much keeping them from becoming even more regulated in the future.

James Heckman

Great interview with U Chicago economist and Nobel Prizewinner James Heckman. (Hat tip Arnold Kling) Ket grafs:

...[S]ome of my colleagues at Chicago were very hostile to this finding, and some remain so. Some want to believe that markets by themselves will solve problems like racial disparity. Markets do many useful things, but they did not solve the problem of race. Not in America. That's probably heresy to admit it as a Chicago economist, but I became convinced that a doctrinaire notion that markets would solve the problem of discrimination is false. Civil rights legislation and civil rights activity played huge roles in eliminating overt segregation in the United States. On the other hand, I also believe that affirmative action in the post-civil rights era has played very little role in elevating the status of blacks. It is important to notice that many blacks are not in the workforce, and the trend of workforce withdrawal even among prime-age black males has increased over the past 20 years.

I also think his comments on non-cognitive achievement enablers (motivation, self-control, ability to look forward) are right on.

Japan and the elderly

As William Gibson said, the future is already here, it's just unevenly distributed.

This excellent post by U Chicago economist and Nobel Prizewinner Gary Becker details a recent trip to Japan:

We come back to the retirement issue this week because I discovered during a just concluded trip to Japan that this country has taken the lead in encouraging much later effective retirement than other developed nations. The system in Japan is a bit complicated, but has several important features that could be implemented in the United States and other nations. The Japanese approach also has implications for many comments on our discussion last week- I respond to these separately.

Japan has the lowest official retirement age (60) but because it offers chintzy pensions and is culturally and legally open to having old workers at low wages, Japanese workers remain in the workforce until they are about 70 years old.

In the US to some degree, but in Europe to a far greater extent, rigid labor laws/anti-age discrimination legislature and generous pensions motivate people to leave the work force and live off the state too early.

Coolest thing ever!

I so want one. (Thanks CD!)

Does aid create Civilization

Fredrik Erixon points out that "The reason countries are poor is not that they lack infrastructure – be it roads, railways, dams, pylons, schools or health clinics. Rather, it is because they lack the institutions of the free society: property rights, the rule of law, free markets, and limited government." (Hat tip Arnold Kling).

In my mind "the institutions of the free society" would have been called "Civilization" in less PC times. Let's face it, "property rights", "rule of law", "free markets" etc. sound like Civilization to me. Countries that are "poor" today used to be fairly average several hundreds of years ago, and the main reason they seem so poor now is because other places have become so much richer.

So the question becomes how do you bring Civilization to uncivilized places? The term "civilization" has a jingoistic air to it, with overtones of colonialization and the white man's burden, but I think it more accurately captures the essence of what's missing than "institutions of free society".

The US seems to be testing whether Civilization can be brought at the point of a gun in Iraq, and the jury is still out on that. France and Germany is testing whether Civilization can be brought on the point of a remote and faceless bureaucracy, and they recently suffered major setbacks to that with the rejected constitution. I don't see, however, how Civilization can be brought on the back of foreign aid, which is what Blair and Bush currently seem keen on. Foreign aid is usually riddled with the sort of corruption, on both donor and receiver side, that Civilization is meant to eliminate.

Internet Regulation

So, blogs have done what Napster could not--introduce regulation to the Internet. It's worth reading this entire interview of FEC Commissioner Brad Smith on the regulation of speech on the Internet. Some key quotes:

Politics is a dirty business. Now politicians don't like being criticized. People who lose in political battles don't like to admit that they lost because maybe their ideas weren't good enough or they weren't persuasive enough, or people just don't agree with them. They would like to say, well, those guys must have an unfair advantage that must be regulated. That's the way that the political system works here and we have now set up the presumption that when things come up that people are unhappy about, government should regulate them.

I go back to a First Amendment perspective, that the First Amendment was there for us to keep government out of this. Now we are past the stage in which we can say that the courts will strike down all campaign finance regulation. But we really need to ask ourselves: is there not one area of American political life that can be unregulated? Is it absolutely required to regulate every area? And if there is one area that could be unregulated, one would think it might be the Internet, given that it's one area where the little guy -- the average citizen -- really can get in there and compete with the big, well-financed interests.

So we are going to say to those folks, well, if you had the power to own a press outlet you are okay and your website is probably going to be okay as well because you are a newspaper or a radio station or what have you. But we're going to say to the pajama-clad blogger in his basement that he doesn't get the press exemption? It seems to me that's exactly the person who we want to be encouraging to be more involved in politics, the person who should get the exemption there.

Some people will say, well, if you give the press exemption to all these Internet sites, what would stop corporations from putting up a website to take advantage of the press exemption? To which the answer is, what stops the corporation now from buying a news station or newspaper?

We are. And again, oddly, with the type of regulation in which the more money you have the more free you will be to participate. A wealthy guy like George Soros, who can spend his millions, or Rupert Murdoch who can own a network, will have heightened influence. Your average small business doesn't have that possibility. They can, however, go onto the Internet. But now we are going to say, "No, you can't take it on the Internet either." Systematically we are working again exactly backwards.

Read the whole thing.

I'm it

Arnold book tags me.

Hmm. Should I be honest or should I signal? I'll be honest.

I liked "The Last Lion", a biography of Winston Churchill by William Manchester who died before he could conclude it. A remarkable man living at a remarkable time.

I forget what this book was called, but it was a collection of book reviews, essays, and short non-fiction by George Orwell stretching from around Homage to Catalunia to the start of the Second World War. I felt I really understood what it was like to live at that time during those events.

I also read a bunch of old essays by Ronald Coase. They were written in the 60s and it's interesting to note how little of what he thought would happen has. 40-50 years ago the big questions were solved -- trade is good, tariffs are bad, taxes need to be broad and low. But here we are and little has changed.

I like Cryptonomicon by Neal Stephenson because it was fast and interesting and had code breaking and submarine cableing. His Mother Earth Mother Board essay is also really good. The Baroque Cycle is too long.

I read anti-trust by Posner, who is a good writer, and a fine introduction to law and economics.

It seems like I have not read much fiction, or that the fiction I have read has had a good dose of non-fiction in it. I think this is pretty common as people get older.

Most of my economic education was not from books, but from people. Murphy, Becker, Posner, Coase, Thaler and excellent but less famous folks like Goolsbee, Picker, Marciano, were where I really learned by applied price theory and its limits -- a gift that keeps on giving.

Housing Crash

This article reveals the irrationality in people's thinking about housing:

The key difference is that stocks are purely financial investments. You can sell a stock on a whim, and you don't have to run out and buy another. By contrast, people live in houses, and if they sell they have to move -- which is both costly and time-consuming.

"How could you have a housing crash?" asks Ted Aronson, managing partner at Aronson Johnson Ortiz, a Philadelphia money manager. "We all just sell our houses and move into a trailer park?"

No, the way you have a housing crash is that the guy next door to you gets divorced and has to sell his house and the market clears at a rate much lower to yours. You are now upside down on your mortgage, so if rates rise or you are forced to sell, you will give your house back to the bank rather than eat the $200K loss. Incidentally, banks expect this.

Banks will have to write down their losses and sell their new assets at firesale rates. This will push mortgage rates higher and depress prices further. People with ARMs will also end up upside down on their mortgage and be pushed to make payments they just cannot. They will cut spending if possible, if not, they will hand the keys back to the bank.

This will continue until the only people holding houses are those with fixed rates they can meet BUT their property price will be set by the guy next door who had to sell.

An interesting point on the consequence of the pop:

The IMF found after studying housing cycles world-wide that "private consumption fell sharply and immediately in the case of housing price busts while the decline was smaller and more gradual after equity price busts." That's even though housing price declines were usually smaller at 30%, adjusted for inflation, compared with 45% for stocks. The U.S. had never experienced a decline of such a size in the period the IMF studied, so it's unclear how much the global experience would apply to the U.S.

Remember -- cheap equity frequently went back to consumers in the form of crazy promos. Those of us who did not get in on the Internet bubble could still order furniture online at deep discounts with free shipping! So an equity pop would just reduce "excess" spending generated by shareholder wealth being channeled to consumer surplus via freebies.

In housing, ARMs mean that higher rates/lower prices will result in less household discretionary spending as more money goes into making those mortgage payments. If people aren't upside down on their loans, they will eat dogfood to make payments until they 1) divorce or 2) get fired. Then they hand the keys back to the bank.

Less shrill

The usually shrill DeLong has 2 good posts:

1) Alan Greenspan proposes "pay-go" caps on Federal spending. This means that the Federal government *always* has to run balanced budgets, much like many states do.

I find this a strange recommendation for several reasons. Firstly I don't care about budget deficits, I only care about interest rates and payments, and budget deficits are just one factor in that. Our borrowing should be curtailed by our willingness (and ability) to pay and the US continues to enjoy very low real interest rates, both short term and long term. When this changes, and it will, tighter fiscal policy will be one of several levers used to rebalance things. But until then, I think it is a mistake to say no to free money.

Secondly, I find this an odd recommendation because the US fiscal imbalance primarily comes from entitlement schemes that will blow up when the ratio of old to young suddenly tips into the grey. "Pay go" will do nothing to 1) prevent such schemes from being set up or 2) prevent such schemes from becoming enlarged. So why bother?

Thirdly, I don't care that pay go will reduce the government's ability to use fiscal policy to smooth out a business cycle. Fiscal changes are too slow, and government too unable to run a surplus during peaks for this to work.

But on the subject of interest rates,

2) Brad DeLong speculates that hedge funds might be the solution to the low long term interest rate puzzle. The puzzle is that the yeild curve is flat to inverting, that is, even as short term rates climb higher, long term rates remain low. This is additionally confusing given all of the long term inflationary pressure we see in the economy from 1) housing prices, 2) fiscal deficit, 3) trade deficit. The dollar is primed to lose value, but long term bond holders don't seem to care.

Brad suggests that hedge funds are betting that bond prices will not move, and so keep prices for long term bonds low by buying them whenever short term rates increase. I have no idea if this is true, but having worked for a hedge fund, and knowing how much marginal money is in marginal hedge funds today, it's quite possible that lots of funds are doing the same thing and will lose their shirts when liquidity (which currently gluts the market) dries up and prices move.

Names

This is the coolest thing ever. Type in the names of your friends -- is it close? Type in the names of your relatives -- are they 30 years earlier?

Personal Workflow continued

OK, so I have Tiger but have not installed with because I think Now-Up-To-Date is not compatible yet. In addition, I only just got DVD burning to work and I'm afraid that will break.

But I *still* want to be able to sync calenders and access standard PIN functionality (calender, notebook, address book) via a browser. I'm going to check out Airset and see what the offer. I do like the idea of calender updates being sent to your phone. I always thought that my watch (or phone, I guess) was the best place to view my upcoming appointments.

Thinking vs Feeling

Arnold has a good, long essay on Thinking vs. Feeling.

Ap-tel

So the rumours turned out to be true after all -- Apple is adopting Intel chips.

Intel's scale, R&D, and cost position meant that Apple could not remain competitive by using IBM/Motorola chips (although I thought ths IBM chips were quite good). The big question is what does this do to Apple's hardware business?

I doubt that Apple will ship OS X/Intel, that people can buy and load onto their PCs. And while I don't see how Intel would lose if people bought Apple/Intel hardware and then loaded Windows XP on it, it does seem weird. This suggests that the hardware and/or software will be crippled in some way to prevent interoperability. Traditionally, customers do not like crippled hardware.

Maybe the iPod has convinced that it was win through design and ease-of-use, since mp3s and Napster++ don't have any lock-in to speak of.

Lots of Angry Bear goodness

I continue to enjoy Angry Bear. Lots of good points to discuss. Let's go through a few.

This post on whether or not the government should maintain competition in the market for super premium ice-cream highlights exactly the key question in anti-trust law: what is the market?

It is often very very difficult to say exactly what the market is and therefore predict if a reduction in the number of market players will result in consumer benefit (from economics of scale and lower production cost etc) or harm (higher prices through monopoly power). Suppose there was only one brand of super-premium ice-cream? Is merely fairly-premium ice-cream a close enough competitor to maintain a elastic demand curve? How about other super-premium desserts, like super-premium cakes? Should they count? And even if neither of those count much, is it easy enough to enter the super-premium ice-cream market that monopolistic prices will be competed away soon enough by a new competitor that currently does not exist?

Even used goods can count as competition. U Chicago economist Kevin Murphy once told me about a lone mining equipment manufacturer that did not enjoy monopoly power because of the second hand market for their own machinery.

This question on reconciling the labor market is also very interesting:

The labor market is indeed weak, by any number of measures. The demand for labor is unusually low for this point in the business cycle.

According to household surveys, relatively few people consider themselves to be "unemployed", and surprisingly few non-working people say that they would like to work if they could.

The point is that salaries seem to be 1) stable and 2) trailing productivity (indicating a weak labor market) but unemployment seems to be low, and those who are unemployed seem to be unemployed voluntarily (indicating a strong labor market). Maybe we have a balanced labor market, where demand is not strong enough to make the happily unemployed switch, but weak enough to not give current workers much bargaining power over compensation (most of which, btw, seems to be sucked up in health insurance).

Emirates Economist

Cool -- a blog by an economist living in Dubai! His observations on the discrimination being forbidden by the Constitution (I did not know the UAE had one)while being required by law (and practice) are right on.

There is a dramatic amount of discrimination in the UAE, which absolutely leads to lower profits for employers. I am surprised that Chilton finds this a contradiction though -- the agency problem in business has been well documented, which is why they often indulge in profit reducing activities. And regulatory preference that reduce profits, or transfer rents from one group to another, are the very life blood of politics.