housing hangover: don't hold your breath on a speedy recovery

Despite the protestations of some acquaintances who were once in investment banking, this is going to be a long and slow recovery. The Fed's efforts (QE2) to lower mid- and long-term interest rates, even if successful, will have limited impact.

Why? Housing.

Increased housing construction has historically been important in recoveries from recessions. It won't be this time. It won't be even if mortgage interest rates fall.

Why? Housing.

Historically, housing construction is the most interest-rate-sensitive component of spending in the economy, but not this time. The housing construction boom of a few years ago left us with a lot of houses. Speculation and low lending standards led to a lot more than the usual number of new houses being built. Now we are stuck with the surplus. Since houses wear out rather slowly, we'll be stuck for a long time.

The first chart with the blue bars shows how the inventory of unsold houses has skyrocketed from the early part of the past decade.

The second chart's red line puts the existing housing inventory in terms of the number of months it would take to sell them. 11 to 12 months of inventory is a lot. This is not a good sign.

Even if the houses sold, we would still have an awful lot of houses selling at low prices. Prices that will stay low for years. Lowering mortgage rates won't cause people to desire to pay for new houses if the supply of existing houses is large.

A Policy Proposal. What can the government do? A three-step process: 1) Speed up foreclosures; 2) have the Fed buy up about eight or nine months of the inventory of unsold houses; and 3) then burn those houses to the ground.

A modest proposal, yes?

Without that happening, don't expect a quick rebound from the Great Recession.

Be blessed.
RB

[ Source for charts]

currency wars

This pretty much explains it. Enjoy!


[HT: Wronging Rights]

dead aid discussion

Here is a presentation by Zambian author Dambisa Moyo and followed by comments by Todd Moss. Next semester I am teaching African Economies (Economics/African Studies 228). Among the books I am using are Moyo's Dead Aid and Moss's African Development. [Warning: Moss's comments may seem a bit more academic.]


[RB's textbooks for Spring '11]

budget puzzle: you fix the budget - interactive feature

Can you do a better job of balancing the budget?

Budget Puzzle: You Fix the Budget - Interactive Feature - NYTimes.com

the wellspring of economic growth and progress

I am a student of economic growth and development. In last Saturday's issue of the Wall Street Journal Scott Adams, creator of the cartoon Dilbert, had a column outlining an important key to economic progress heretofore unnoticed: hamster-brained sociopath bosses.

The Wall Street Journal
November 6, 2010, p. C3

The Perfect Stimulus: Bad Management

If no one had a hamster-brained sociopath for a boss, who would start new businesses?

By SCOTT ADAMS

One of my earliest childhood jobs involved shoveling manure at my uncle's dairy farm in upstate New York. Things were going well until my uncle explained that no matter how well I performed, I would never be promoted to farmer. Or even cow. I had hit the manure ceiling.

I consider that experience my first economic stimulus package—the unwelcome realization that my current job was a dead end. While my classmates were building snowmen with carrot noses (mostly the girls) and carrot genitalia (mostly the boys), I started to do some serious career planning about how to get out of the fecal relocation profession and into the warm embrace of a loving corporation. I studied hard, and I earned money for college by mowing lawns, shoveling snow, shoveling even more manure, and (my personal favorite) shoveling frozen manure covered with snow. I saved my meager funds, and with the help of my parents, who both took extra jobs, plus a few scholarships, I clawed my way into college.

Years later, my dream came true. I got a job with a large bank, and I never again needed to shovel manure. Corporations use something called PowerPoint instead. Thanks to my farm training, I was so good at designing PowerPoint slides that my coworkers called me "The Natural." Jaws dropped when I introduced my signature move: the frozen PowerPoint slide with snow on top.

In those days, I was a furious bundle of ambition and determination. The old-timers told me I had a "rocket strapped to my ass." All I needed to do was get my "ticket punched." It wasn't long before I was able to enjoy my second economic stimulus package: bad management.

Though most of my immediate bosses were entirely reasonable and competent, the organization at large was riddled with hamster-brained sociopaths in leadership roles. Surely, I thought, this must be a problem that exists no place else on Earth. Otherwise we'd all be living in caves and holding long meetings on the feasibility of using sticks as stabby things.

One day, a position opened above me, and I was the most obvious candidate to fill it. My boss called me into her office and said she had some bad news. She explained that the media was giving our company a lot of heat because almost all of our managers and executives were white males. Promoting me, she explained, would only make things worse. I asked how long I might need to wait for all of this to blow over. My boss was vague, but she said the timeline involved smoothing out the effects of two centuries of corporate discrimination.

I decided to jump ship and go where my talent and hard work would be rewarded. I took a job at the local phone company and soon discovered, to my horror, that banking was not the only industry in the world managed by hamster-brained sociopaths. Once again, my immediate bosses were quite capable, but interacting with other departments was like being the last human in Zombieville and trying to buy groceries at dusk. Still, it was marginally better than shoveling manure, so I doubled down. I finished my MBA classes at night and distinguished myself as an up-and-comer. One day my boss called me into his office and explained that the media was giving the phone company a lot of heat because almost all of the managers and executives were white males. So, he explained, promoting me would only make things worse. You might say that was the day that the "Dilbert" comic strip was born, although I had not yet drawn one. Let's call it a tipping point. From that day on, I considered myself an entrepreneur. All I had to do was figure out what business I was in. The phone company was willing to pay for almost any sort of semi-relevant training or education that I was willing to endure. It was like an accidental school for entrepreneurs. From an economic viewpoint, I was in exactly the right place, with exactly the right amount of career discomfort.

I wasn't suffering alone. Many of my co-workers already had active side businesses and ambitious expansion plans. The guy in the cubicle behind me was running a concert equipment rental business. Across from me was a guy running a computer tech support business. We had Amway dealers, Mary Kay sales people, inventors, authors and just about any other business you can imagine. That's not counting all of the business plans in the incubation phase. I think we all understood that working in a cubicle and being managed by Satan's learning-challenged little brother was not a recipe for happiness.

The way I describe it may sound pessimistic, but consider the alternative. Imagine a parallel universe where employees enjoy going to work. They feel empowered and fulfilled—so much so that they don't care about the size of their paychecks and never want to leave their jobs. That's exactly the sort of nightmare scenario that would destroy the economy. The last thing this world needs is a bunch of dopey-happy workers who can't stop humming and grinning. Our system requires a continuous supply of highly capable people who are so disgruntled with their jobs that they are willing to chew off their own arms to escape their bosses. The economy needs hamster-brained sociopaths in management to drive down the opportunity cost of entrepreneurship. Luckily, we're blessed with an ample supply.

To put it in plainer terms: The primary purpose of management is to kill any hope that staying in your current job will work out for you. That sort of hope is like gravel in the engine of progress. The economy needs workers who are fed up, desperate and willing to quit their jobs for something better. Remember, only quitters can be winners, because you can't do something great until first you quit doing something that isn't.

You see this same dynamic with countries. The United States is a nation founded by people who couldn't stand the leaders of their old homelands. I'm no geneticist, but I suspect that the "screw it, I'm out of here" attitude can get passed on. We're probably the most disgruntled, self-loathing, hard-to-satisfy people on Earth. It's no wonder our GDP is awesome.

Israel is another perfect example. The entire nation is full of people who were displeased with their last situation. And Israel's economy is one of the most vibrant in the world. If every Israeli became satisfied at once, they couldn't keep the lights on for a week.

I have always assumed there's a correlation between imagination and risk-taking. You wouldn't leave an unpleasant but relatively safe situation unless you could imagine a better outcome. So the people who leave a company first tend to be the visionaries who can best imagine entrepreneurial success. The last wave of people who leave are usually excreted just before the door is chained. They didn't imagine it would happen so soon. Bad management is how imagination gets wings.

—Scott Adams is the creator of 'Dilbert.'
[source]

a manly man child

RB spent Thursday through Sunday in New Hampshire hanging out with his three-month-old grandson. They spent a lot of time laughing and discussing world events.

William is about the happiest, best-natured baby RB has ever seen.

Like most babies William is attracted to colorful objects. However, when RB showed his grandson a plain gray remote control, William's eyes locked on it. There was nothing to attract him except a deep, primordial, abiding desire to be one with the remote.

This intensity clearly indicates that William is indeed a great manly man child.

Later William spent a long time laying on this grandpa's lap where they held a lengthy conversation speaking in unknown tongues. They had a great time giggling and laughing in the joy of the Lord.

Obviously, this baby is also a great manly man child spiritually.

We can only conclude that even at three months old, he is a totally awesome guy.

Be blessed!
RB

assigned reading for economic development

Why Some Islanders Build Better Crab Traps

by Matt Ridley
The Wall Street Journal (Saturday 2 October 2010, p. C4)

An odd thing about people, compared with other animals, is that the more of us there are, the more we thrive. World population has doubled in my lifetime, but the world's income has octupled. The richest places on Earth are among the most densely populated.

By contrast, it's a fair bet that if you took a few million rabbits and let them loose on Manhattan island, they would starve, fight, sicken and generally peter out. Whether you like it or not, whether you think it can continue forever or not, you cannot deny that when people come together in dense swarms, they often get richer.

In this fact lies a vital clue to the nature of the human animal, one that has until recently been overlooked: namely, that what explains the sudden success of the human species over the past 200,000 years is not some breakthrough in individual ability, but rather the cumulative effects of collective enterprise, achieved through trade. A new study of fishing tackle in the South Pacific provides intriguing support for this notion.

Two anthropologists, Michelle Kline and Rob Boyd, collected information on the "marine foraging technology" used by native people in 10 different groups of Pacific islands at the time of Western contact. They assigned scores not only for the number of tools but also for their complexity. A stick for prying clams from the reef, for example, counted as one techno-unit, whereas a bamboo crab trap with a baited lever counted as 16, because it comprised 16 working parts, each a technology in its own right.

What they found was that the bigger the population, the more varied and more complex the tool kit was. Hawaii, with 275,000 people at the time of Western contact, had seven times the number and twice the complexity of fishing tools as tiny Malekula, with 1,100 people.

But it's not just the size of the population on the island group that matters, but the size of the population it was in contact with. Some small populations with lots of long-distance trading contacts had disproportionately sophisticated tool kits, whereas some large but isolated populations had simple tool kits. The well-connected Micronesian island group of Yap had 43 tools, with a mean of five techno-units per tool, while the remote Santa Cruz group in the Solomon Islands, despite having almost as large a population, had just 24 tools and four techno-units.

Mr. Boyd and his colleague Joe Henrich think that cultural change happens when one person learns a specialized skill and teaches it to others. But if others are poor learners or the teacher dies young, there is a tendency for skills to fade, creating a "treadmill of cultural loss," especially in small and isolated societies. Tasmania, for example, suffered a progressive simplification of its technology after its people were isolated by rising sea levels 10,000 years ago.

This tendency is counteracted by the sporadic innovation of expert specialists. Their ideas, embodied in technology, spread by trade and imitation. The greater the population and the connectedness between populations, the greater the pool of innovators to draw upon.

Archeologists suggest that the ephemeral appearances of fancy tool kits in parts of southern Africa as far back as 80,000 years ago does not indicate sudden outbreaks of intelligence, forethought, language, imagination or anything else within the skull, but simply has a demographic cause: more people, more skills.

Technology is more than just a barometer of human collaboration. It is the embodiment of human collective intelligence. Most of the technologies we use, as the economist Friedrich Hayek first observed, are things that nobody knows how to make from scratch. Humans have transcended the limits of their own brain power by combining their brains into networks.

Thanks to the Internet, the islands of humanity are now connected as never before, with only a few remote atolls like North Korea and Burma still holding out. So we can draw upon the inventiveness of a network of more than six billion people.

—Matt Ridley's books include "The Rational Optimist" and "Francis Crick." His column explores the science of human nature and its implications.

tuckies win over yale grad school

Last Saturday was the first game of the year for the Tuck (School of Business at Dartmouth) rugby team. It was also Captain Kenny's first rugby game ever. (That's him in the middle.) After falling behind, Tuck eventually won 17-10 over Yale Graduate School. For more....

jobs, the great recession, and understating unemployment

Check out the chart I found (click chart for a larger image). It looks at employment changes in different recessions. There are problems with comparing labor markets from different time periods. However, these problems are minimized by looking at a) employment (unemployment numbers can get funky) and b) percentage losses in jobs (this sort of normalizes the data).

You can see why the recent downturn was nicknamed the Great Recession.

There are too many problems with the unemployment rate for it to be very useful. In a downturn the unemployment rate understates unemployment. This understatement is even worse in a severe downturn like the recent Great Recession.

If you can put up with a bit of an explanation as to why, I'll show you some numbers that give a better picture of how bad things are.

A person is only classified as "unemployed" if that person a) did not work for one hour or more for pay in the week previous to the survey and b) also actively sought employment.

[NOTE: This definition of unemployment has absolutely nothing to do with whether someone is eligible for unemployment benefits.]

This overlooks some people like part-timer workers who lost full-time jobs or desire full-time jobs. In a sense they are only partially employed and therefore are also partially unemployed. The unemployment stats make no allowance for these folks.

If someone gives up looking for work (the so-called discouraged worker), or is otherwise able and willing to work but didn't look for a job, then this person is not counted as unemployed. Most would consider people like this as part of the labor force but they are not counted as such.

Now let's see how this biases the numbers.

The published unemployment rate for August 2010 is 9.6%. (BTW, 5.5 of this 9.6, a majority of the official unemployed, have been unemployed for 15 weeks or more. This is quite high but still doesn't get at the severity of the problem.)

If you include all people who are out of work but willing and able to work, whether actively looking for a job or not, the unemployment rate would climb to 11.0%.

If you also include those who took part-time rather than full-time jobs for economic reasons, then the unemployment rate would jump to 16.7%.

9.6% vs. 16.7%. A more reasonable statistic of unemployment would be over 7 percent points higher. In a sense this means unemployment may be 74% higher than the official rate indicates.

It ain't even close.

Be blessed,
RB

[source of statistics]

aggregated china posts #4

This may well be the last of MissBeee's posts on our China trip:

Lazy Lijiang Days.

Food.

Previous posts on our 2010 China trip:

a great wall day

aggregated post on china trip

aggregated china post #2

stealing from the best -- aggregated china posts #3

someone's grandparents went to china