Saturday, February 18, 2017

Nice summary of the affordable housing crisis

in the Stanford Law Review:

[the cause of the affordable housing crisis] is uncontroversial among urban economists but not broadly understood by low-income families, advocates for low-income families, housing activists, and their allies in academia, policy, and government—in short, the housing advocacy community. In the face of higher housing costs, the housing advocacy community tends to argue for a “kludgy” set of policies that can actually prevent new development and end up increasing housing prices— campaigns to impose building moratoria, for example, or downzonings, community benefits agreements and other exactions, lengthy approvals procedures that disadvantage developers relative to NIMBYs, various forms of rent control, and a focus on affordable housing to the exclusion of other types of development. …. 
In the suburbs, the politics of exclusionary policies are hopeless: the cartellike interests of suburban “homevoters” are well-served by current exclusionary policies, state and federal courts for the most part won’t intervene, and there is very little interest among state legislators to impose regional or state-wide solutions.11 The picture is less bleak in exclusionary cities: renters, who would directly benefit from lower housing prices, are a majority in many of these cities, and advocates for affordable housing already form a politically influential bloc—but they use their power to ends that are often counterproductive.12 While there are other serious obstacles to expanding housing supply, the housing advocacy community could and should become an important part of the fight against urban land use regimes that systematically privilege a city’s wealthiest and most powerful residents. … 
A city’s ability to remain affordable depends most crucially on its ability to expand housing supply in the face of increased demand. Among the people who care most about high housing costs there is a lack of understanding of the main causes and the policy approaches that can address them. The central message of this Article is that the housing advocacy community—from the shoeleather organizer to the academic theoretician—needs to abandon its reflexively anti-development sentiments and embrace an agenda that accepts and advocates for increased housing development of all types as a way to blunt rising housing costs in the country’s most expensive markets.
HT: Campbell

Monday, February 13, 2017

Who monitors the monitors?

In our problem solving framework we ask three simple questions to diagnose goal misalignment:
  • Q1:  Who made the bad decision?
  • Q2:  Did they have enough information to make a good decision?
  • Q3:  And the incentive to do so?
Answers to these three questions will isolate the source of the problem and suggests one of three generic solutions:
  • S1:  Let someone else make the decision, someone with better information or better incentives.
  • S2:  Give more information to the current decision-maker.
  • S3:  Change the incentives of the current decision-maker.
The first solution is always tempting, but you have to make sure that whoever makes the decision has goals aligned with those of the organization, i.e., enough formation to make a good decision, and the incentive to do so.  This is sometimes referred to as the problem of "who watches the watcher?"

The economist has an article on the history of this problem:
In business and finance, this is known as the “principal-agent” problem. Shareholders employ managers to run a company; investors use fund managers to look after their savings. That makes sense. It allows us to take advantage of the expertise of others, and of economies of scale in fund management (it costs little more to look after $10m than $1m). But it is extremely hard to align the interests of principals and agents exactly.

To spoil the ending, the solution is always "it depends."

Saturday, February 11, 2017

Cost disease in education and health

The two graphs describe the problem:

The question an economist would ask is simple:
So, imagine you’re a poor person. White, minority, whatever. Which would you prefer? 

  • a.  Sending your child to a 2016 school? 
  • b. Or sending your child to a 1975 school, and getting a check for $5,000 every year?

We ask the same question:

Do you think the average poor or middle-class person would rather:

  • a) Get modern health care
  • b) Get the same amount of health care as their parents’ generation, but with modern technology like ACE inhibitors, and also earn $8000 extra a year

Thursday, February 9, 2017

Why three point shots are the best in basketball

Basketball coach Dan D'Antoni uses expected value per attempt to explain why his team takes so many 3-point shots:
"If you can get a layup and it's clean — it's not one that's highly contested — it's [worth] 1.8 points [per attempt]. It's 1.3 from that corner, 1.27. Do you know what a post-up is, with a guy standing over top of you? It's 0.78. So you run your team down there and we'll see how long you can stay with teams that can play the other way. You've seen it in the NBA. The last two championships have been Cleveland and Golden State. What do they do? You don't see anybody post up. They just spread that thing out and go."

HT:  Jason

Thursday, February 2, 2017

Another pension fund lowers discount rate to 7%

If a pension fund has to pay out $100 in 30 years, and earns 7.5% on its investments, it must save 100/(1.075)^30=13.14 today.  If it earns only 7.0%, the amount that it much save increases by 15%.

Calstrs, the second biggest pension fund in the world, just admitted that it is reducing its target rate of return (also its discount rate) from 7.5% to 7.0%.  The increase in savings is split between the teachers and the State of California, the employer of the teachers.
Approximately 80,000 current members of Calstrs could see an increase in their yearly pension contributions of $200 or more as a result of Thursday’s move, Calstrs said. The state of California has already budgeted an extra $153 million for its pension contribution to cover the rate change, bringing the total contribution to $2.8 billion.

Saturday, January 28, 2017

Why currency devaluations are losing their punch

Typically a currency devaluation will help domestic firms and harm domestic consumers because it makes exports cheaper in the foreign country, and imports more expensive.  However, if the domestic firms also import, then the currency devaluation also drives the costs of exporters up.
We find that large exporting firms are also the most import-intensive firms, sourcing a large share of their intermediate inputs from abroad.

Further evidence comes from the effect of devaluations on large and small firm prices, called "pass-through:"
We estimate that large exporters pass-through only about 50% of exchange rate devaluations into their prices. In other words, in response to a 10% devaluation, these firms would cut their export prices only by 5%. ... By contrast, the small exporting firms, which rely on few imported inputs in production, reduce their prices by nearly the full amount of the devaluation.

In other words, the simple message of Chapter 11, that currency devaluations benefit domestic firms and harm domestic consumers, is muted by the mere fact that the biggest exporting firms are also importers.

HT:  Microeconomic Insights

Friday, January 13, 2017

RIP, Dewey

Colleague former Fed Governor Dewey Daane, died last week at 98.  Nice obit in WSJ.  He was one of the first to welcome me to Vanderbilt, invite me into his Tennis game, and introduce me to the rest of Nashville, all of whom he knew.  One of the most colorful characters I have known.  We will miss you.

Wednesday, January 4, 2017

Short-termism is inefficient

The Knicks basketball team have only a three-year contract with their best young player.  As a result, they have less incentive to worry about his long-term viability, and have increased his playing time from 28 min/game to 35 min/game.  Somewhat predictably, Kristaps Porzingis got injured.
“He’s just turned 21,’’ said the NBA scout, who has worked for multiple teams. “They’re draining Kristaps, putting more minutes on him than anyone. Physically he grew in the offseason. It’s a tremendous amount of strain on new material — ligaments, tendons, knee joints for a big guy. It’s unbelievable stress on his body.’’
There seems to be an unconsummated wealth-creating transaction here: if the parties signed a longer-term contract, the team would potntially benefit from any additional longevity (they would reap the rewards from investing in his future), which could make the team, and the player, both better off.

HT:  Marginal Revolution