In the past couple of weeks there has been quite stir about a proposal from the Republican US Representative from Wisconsin, Paul Ryan. Much of the initial analysis has focused on the usual partisan, and political dialogue about Federal spending and the role of the Government. There has been few close looks at the actually analysis used to put the budget together or the real ramifications of passing this kind of fiscal package.
One first attempt at analyzing some of the basic assumptions is a piece written by NY Times columnist, Paul Krugman. Krugman has never been shy about his political leanings and has often written explicitly about his liberal leaning. However, in this piece he did a pretty good job about setting his partisan leaning and focused basics. He points to the suspicious decrease in unemployment in the next 10 years from close to 9% to under 3%, something that is a) never achieved since World War 2 and b) is not possible in a sustainable economy. Krugman also points to the unrealistic decrease in non-defense, non-entitlement funding from 12% of GDP at current levels to 3.5% of GDP in 2021.
Still, as much as these 2 assumptions undermine the budget, there is still much to desired in looking fully at this budget or the potential ramifications. This void was filled yesterday by the incredibly credible, non-partisan research group Macroeconomics Advisers (Macro Advisers)in a post on their company blog. Macro Advisers test many of the assumptions used in analysis used by the authors of Rep Ryan's Budget, originally put together by the conservative Heritage Institute. After much simulation, Macro Advisers have founds several flaws in the analysis, and that the economic models were intentionally altered to produce favorable results for the Ryan budget. They point to everything from GDP growth expectations, unemployment projections, interest rate assumptions, and the relationship between spending contractions and capital investment.
The most disturbing part about the Macro Advisers analysis is that it points to the intentional fabrication of economic analysis to produce ideologically based policy that has the potential to derail economic recovery and effect the livelihood of the country. Policy makers need take fiscal policy more seriously and consider how it impacts the citizenry. Fiscal policy that impacts such a large percentage of the population should not be treated as a political game, but should consider all potential economic and social consequences.
Thursday, April 14, 2011
Thursday, January 6, 2011
NYT: Assessing the Housing Market by CASEY B. MULLIGAN
There was a great article issued in the New York Times yesterday about the difficulties in assessing the the national housing market. It was written by Casey B. Mulligan, and economic professor at the University of Chicago. Although I often disagree with the works that comes out of the Economics Department at the University of Chicago because of its theoretical conservative bent, Mulligan has stood out as a pragmatic centrists regarding economic policy (Examples of other pieces written by him that I recommend are: Sticky Wages, Sticky Prices and the Keynesians (Dec. 15, 2010); and Stop, Thief! (Nov. 19, 2010).
I have included his most recent article below, as a great example of boiling down the complexity in markets, and the policy that is drafted to affect them. I hope to include more of his works, along with my commentary and analysis in the future.
Assessing the Housing Sector
By CASEY B. MULLIGAN
The New York Times: January 5, 2011.
http://economix.blogs.nytimes.com/2011/01/05/assessing-the-housing-sector/?ref=business
Casey B. Mulligan is an economics professor at the University of Chicago.
A few economists are contending that our housing market is now in a “double dip,” based in part on last week’s report of housing price indexes for September and October that were lower than they were during the summer. In my opinion, the data on housing prices and construction do not show any significant housing market change during the second half of 2010.
When connecting the housing sector with the wider economy, three different measures of housing prices are helpful: inflation-adjusted housing prices, inflation-unadjusted housing prices and cost-adjusted housing prices.
Inflation-adjusted housing prices tell us how much the prices of homes have changed relative to the prices of other consumer goods. If, for example, we want to know whether demand for housing these days is any different than it was before the housing bubble, it helps to check whether, from the 1990s through 2010, housing prices failed to increase as much as other prices have.
In this case I look at a housing price index that has been normalized by a consumer price index.
Inflation adjustments are not appropriate for the purposes of analyzing foreclosures – a big drag on our economy – because the mortgage principal that pulls homeowners “under water” is not adjusted for inflation either. If unadjusted housing prices increase, even if more slowly than other consumer prices, that helps homeowners swim out of the water.
For this purpose, I look at an index of the dollar value of housing properties, without any adjustment for inflation.
For the purposes of understanding construction activity, it helps to know whether housing prices have increased more than the costs of building materials. The more that housing prices increase beyond the cost of materials, the more value that can be created by home construction activity.
For this purpose, I look at an index of housing prices that has been normalized by an index of building costs.
It turns out that practice is messier than theory, because there are so many different houses in America and many different price trends. In practice, it matters which housing price index is used, regardless of which inflation or cost adjustment is used.
The Case-Shiller repeat sales index is one such index of existing homes. The Federal Housing Finance Agency has another index of existing homes (and there are others, as well). The Census Bureau has a quality-adjusted index of new home prices.
Chart 1 displays the three aforementioned home price indexes, measured quarterly without any inflation adjustment. The Case-Shiller index for the third quarter of 2010 (the first quarter without the government’s home buyer tax credit) was essentially the same as in the previous quarter. The other two indexes show slight decreases over the same time period, although well within the range of ups and downs over the previous six quarters.
By themselves, these data suggest that homeowners did not go significantly deeper under water in the third quarter and that the housing market trends were not dramatically different in the third quarter than in previous quarters.
Chart 2 displays the same three indexes, adjusted by the implicit price deflator for consumer spending. Because inflation has been low recently, it shows a similar pattern to Chart 1. By themselves, these series show no dramatic change in housing demand over the most recent quarter.
Chart 3 displays the same three indexes, adjusted by the producer price index for home building materials. Deflated this way, the Case-Shiller index actually shows a housing price increase from the second to the third quarter. That’s because building costs peaked in May and have been lower since then.
Without home prices falling by this measure, we do not expect construction activity to be lower than it was during 2009 (but, unsurprisingly, lower than it was during the short rush to sell homes before the tax credit expired).
You may notice that various housing price indexes disagree, and our most recent data is still three months old. Yet another approach is to look at home construction activity. Chart 4 displays monthly home construction activity through November 2010, measured as the number of housing permits, housing starts, homes under construction and homes completing construction.
Permits and starts are particularly interesting, because homes take time to build and we presume that many builders are looking ahead to the prices homes will command in the future, when the construction project is complete. Those series were actually higher in November 2010 than they were for several months before.
Predicting the future is difficult, but the price and construction data so far do not seem to suggest that home values will be significantly different this year than they were in 2010.
I have included his most recent article below, as a great example of boiling down the complexity in markets, and the policy that is drafted to affect them. I hope to include more of his works, along with my commentary and analysis in the future.
Assessing the Housing Sector
By CASEY B. MULLIGAN
The New York Times: January 5, 2011.
http://economix.blogs.nytimes.com/2011/01/05/assessing-the-housing-sector/?ref=business
Casey B. Mulligan is an economics professor at the University of Chicago.
A few economists are contending that our housing market is now in a “double dip,” based in part on last week’s report of housing price indexes for September and October that were lower than they were during the summer. In my opinion, the data on housing prices and construction do not show any significant housing market change during the second half of 2010.
When connecting the housing sector with the wider economy, three different measures of housing prices are helpful: inflation-adjusted housing prices, inflation-unadjusted housing prices and cost-adjusted housing prices.
Inflation-adjusted housing prices tell us how much the prices of homes have changed relative to the prices of other consumer goods. If, for example, we want to know whether demand for housing these days is any different than it was before the housing bubble, it helps to check whether, from the 1990s through 2010, housing prices failed to increase as much as other prices have.
In this case I look at a housing price index that has been normalized by a consumer price index.
Inflation adjustments are not appropriate for the purposes of analyzing foreclosures – a big drag on our economy – because the mortgage principal that pulls homeowners “under water” is not adjusted for inflation either. If unadjusted housing prices increase, even if more slowly than other consumer prices, that helps homeowners swim out of the water.
For this purpose, I look at an index of the dollar value of housing properties, without any adjustment for inflation.
For the purposes of understanding construction activity, it helps to know whether housing prices have increased more than the costs of building materials. The more that housing prices increase beyond the cost of materials, the more value that can be created by home construction activity.
For this purpose, I look at an index of housing prices that has been normalized by an index of building costs.
It turns out that practice is messier than theory, because there are so many different houses in America and many different price trends. In practice, it matters which housing price index is used, regardless of which inflation or cost adjustment is used.
The Case-Shiller repeat sales index is one such index of existing homes. The Federal Housing Finance Agency has another index of existing homes (and there are others, as well). The Census Bureau has a quality-adjusted index of new home prices.
Chart 1 displays the three aforementioned home price indexes, measured quarterly without any inflation adjustment. The Case-Shiller index for the third quarter of 2010 (the first quarter without the government’s home buyer tax credit) was essentially the same as in the previous quarter. The other two indexes show slight decreases over the same time period, although well within the range of ups and downs over the previous six quarters.
By themselves, these data suggest that homeowners did not go significantly deeper under water in the third quarter and that the housing market trends were not dramatically different in the third quarter than in previous quarters.
Chart 2 displays the same three indexes, adjusted by the implicit price deflator for consumer spending. Because inflation has been low recently, it shows a similar pattern to Chart 1. By themselves, these series show no dramatic change in housing demand over the most recent quarter.
Chart 3 displays the same three indexes, adjusted by the producer price index for home building materials. Deflated this way, the Case-Shiller index actually shows a housing price increase from the second to the third quarter. That’s because building costs peaked in May and have been lower since then.
Without home prices falling by this measure, we do not expect construction activity to be lower than it was during 2009 (but, unsurprisingly, lower than it was during the short rush to sell homes before the tax credit expired).
You may notice that various housing price indexes disagree, and our most recent data is still three months old. Yet another approach is to look at home construction activity. Chart 4 displays monthly home construction activity through November 2010, measured as the number of housing permits, housing starts, homes under construction and homes completing construction.
Permits and starts are particularly interesting, because homes take time to build and we presume that many builders are looking ahead to the prices homes will command in the future, when the construction project is complete. Those series were actually higher in November 2010 than they were for several months before.
Predicting the future is difficult, but the price and construction data so far do not seem to suggest that home values will be significantly different this year than they were in 2010.
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