Tuesday, December 19, 2017

Closed Access and Public Sentiment - Taxes

I have been meaning to do a broader post on corporate taxes, incomes, etc., regarding the way that corporate taxes are being treated as if they are simply pocketed by shareholders.  This clearly cannot be the case in the long run in an open economy.  But today, I just want to make one brief observation.

I am wrong about that in a Closed Access economy.  And, this is one of many reasons why Closed Access is so damaging.

Here is a tweet from Kim-Mai Cutler, who does some great work on housing issues in California:
My first instinct is to naysay this tweet.  But, that's because my instinct is an Open Access instinct.  For classical economic models to work, we have to live in a sufficiently open system.  In Phoenix, making real estate passthroughs more profitable would be an affordable housing policy, because it would induce new investment into rental properties, it would make the pre-tax return required by real estate investments lower, and it would lower the rent on properties of a given cost.

We can argue how many subsidies vs. taxes we should apply to real estate.  Maybe we don't want to subsidize real estate.  That would be fine.  But, we should be able to agree that, in terms of rent - which is the important factor for actual housing affordability - subsidies to real estate investors will make the existing housing stock more affordable and will increase supply.

But, this doesn't happen in Closed Access cities.  There is a political limit to supply in those cities.  So, if tax policy shifts to give landlords more profit, they do pocket the profit.  It doesn't matter if new capital would be drawn to real estate in a Closed Access city.  Supply does not reflect economic costs and benefits.

To the extent that this benefits landlords while pulling back on mortgage interest deductions reduces benefits to homeowners, this set of policies probably does level the playing field a little more compared to how it has been in Closed Access cities, so that owner-occupiers with access to credit may be less likely to outbid landlords on existing units.

In general, Closed Access markets aren't governed by supply and demand, though.  They are governed by the battle over economic rents that are the result of political exclusion.  So, on new units, if the basic building cost would be $200,000 per unit, and they sell for $600,000 per unit, the difference will inevitably be claimed by various interest groups.  Mostly, the difference will be claimed through various impositions, fees, and taxes, that are negotiated between local governments and the builders.

So, policies like tax subsidies don't affect supply.  Instead, they affect prices - how far prices are above the natural market cost that would arise in a market that allowed new supply.  And, to a certain extent, they reflect a battle between various levels of government about who gets to claim the economic rents from exclusion.

Now, workers who might earn $100,000 in Atlanta may move to San Francisco where they earn $150,000, but with $40,000 in additional costs.  $20,000 of that might go to the landlord, $10,000 to the local government in taxes, and $10,000 to the federal government in taxes.

The proposed policy of eliminating the deductibility of local taxes might shift the economic rents, in the long run, all else equal, with $18,000 going to the landlord, $9,000 going to local government, and $13,000 going to the federal government.  (These are broad, made up numbers to help think about the context.)  So, reducing the SALT deduction is really a way for the federal government to get its hand on some of those economic rents.

It's tempting to say, let's find ways to tax those cities even more, until all the economic rents flow to Washington and there is no more advantage to political exclusion.  But, the best solution would be to open those cities up so that more Americans can benefit from the amenities and characteristics that allow those cities to collect economic rents to begin with.

On the other hand, our chosen policies have been so poor that bringing down home prices through targeted taxes on Closed Access cities would be a huge improvement on the policies we chose to implement in our zeal to bring down home prices.

In any case, the core of the problem is Closed Access.  Where the idea that capitalists just pocket public largesse might normally be fallacious, Closed Access makes it true.  And, this reasonably leads to a plurality in public opinion to enforce policies that are explicitly damaging.

Wednesday, December 13, 2017

November 2017 CPI

More of the same.

By the way, I don't see falling rent inflation as a good thing.  There isn't enough residential investment to moderate rent inflation through supply.  It is a demand-side effect.  This is reminiscent of 2007.  I continue to expect rate hikes to trigger a contraction, but admittedly I've been a little ahead of the curve on this.

Inflation has declined and lending has been soft, but it hasn't yet translated into broader contraction.  Although, long bond positions haven't performed so badly in the meantime.

Friday, December 8, 2017

November Employment Flows

I have been on the lookout for a bit of a contraction because of Fed hawkishness, stalled credit growth, etc.  So far, this has not come about.  Strangely, bank lending seems to have stalled at about the time of the 2016 election, but at the same time, at least initially, the yield curve steepened, which should be a bullish sign, and of course equities have shown healthy growth.

Employment tends to be a lagging indicator, so it isn't necessarily that useful for making tactical cyclical decisions, but in the year since the election, employment flows have also been surprising.  Both in net terms and in gross terms, they have taken bullish turns.

Near the end of 2016, net flows from Unemployment to Employment had been showing weakness, but this has completely reversed, and now net flows from unemployed to employed are back to recovery levels.

And, gross flows were all turning sour in late 2016.  Flows between Employment and "Not in Labor Force" had started to decline in both directions, which is bearish.  And flows between Unemployed and "Not in Labor Force" and Unemployed and Employed had both stopped declining, which also tends to happen during contractions.  But, these flows have also reverted to bullish trends.

Go figure.

The Fed seems intent on sucking cash out of the economy while the CFPB continues to enforce capital repression on working class home buyers.  Yet, there appears to be some loosening of credit, possibly simply from the continued rebuilding of equity, and low-end housing is finally recovering at a rate similar to high-end homes.  There is a lot of catching up to do there, though, if we will ever stand for it.  Are there enough tailwinds to keep this thing going?  I hope.  With so many contradictions, it's tough to be a speculator in this context, though.

Thursday, December 7, 2017

If we talked about labor like we talk about capital

We have all seen many articles, such as this one, with the title, "Can't Find Good Workers? Pay Up!"  There is a pervasive notion that morally and practically, wages are always too low and asset prices are always too high.  In the big, bad complicated world, those prices mostly are simply a reflection of fundamental economic reality, so that forcing them in the direction we are predisposed to favoring can create unintended consequences.  Even trying to change those fundamental realities to nudge those prices into a friendly direction might lead to outcomes that are difficult to fully understand.

There are issues where it is the case - that prices are too high and wages are too low - and changing the fundamental economic reality can be beneficial to everyone.  I have gone on and on here about the housing problem, and how allowing new capital into urban housing markets would lower asset prices and increase real wages in a way that would almost certainly be beneficial to everyone (except urban rentiers).  In 2006-2008, we did manage to bring down asset prices, and this was generally cheered or accepted.  But, the fundamental reality we changed in order to do that (credit and monetary deprivation) didn't really have much to do with why asset prices were high to begin with, so we have been drowning in unintended consequences ever since.

But, since this notion that wages are always too low and prices are always too high dominates public thought, in a sort of vulgar way, the Treasury and the Fed have never really been taken to task for the mistakes they made.  Instead, they have been largely criticized for the few things they did right, which were helping to keep asset prices from collapsing for the wrong reasons.

....aaaanyway, when all is said and done, it is a bit disconcerting to me how much of our conception of what has happened is predetermined.  If you get sick, the reaction from someone who believes in evil spirits vs. someone who believes in germ theory will be strikingly different.  It really seems to me that in many cases, our perception hinges on a set of choices that really has that broad of a scale.  This is especially true in complex areas, and that certainly includes finance.  Sometimes books or documentaries regarding the financial crisis even reference demon terminology, as if to make the point.

This caused me to imagine how it would look if we spoke about labor markets the same way we talk about capital markets.........


As the recovery heads toward a decade, it is getting harder and harder for workers to keep counting on the "greater fool" to keep this going.  Employers who are addicted to the gravy train need more workers to feed the beast, but all the good workers are taken.  So, those marginal resumes start looking more and more enticing.  And, wages keep getting pushed up as employers "reach for capacity".

Is there any way these substandard workers will ever pay off for those greedy employers?  Unlikely.  But, "You gotta keep dancing until the music stops." as they say.

As the frenzy builds, the gap between work histories and education on resumes and the actual qualifications of the remaining job seekers widens.  But, who cares?  Those workers get placed through the booming temp sector.  It's not their problem if the worker isn't qualified.  It would be one thing if you were hiring someone to work in your own office, but now we just combine all these substandard workers into one big pool that gets divvied up among employers.  In this frothy market, they naively take those resumes at face value, and the employment agencies pocket their fees.  And the machine just keeps cranking along.

Obviously, we need some regulation to stop this from getting out of hand.  If we had put a stop to the frothy labor markets of the 1990s, maybe we would have had more stable compensation since then instead of the declining labor force participation and stagnant wages that we ended up with.  Federal agencies need to put safeguards in place to prevent labor contracts with inflated wages and to prosecute false applications and resumes.    We all know this stuff is going on, yet have there been any high profile prosecutions?

And, of course, loose money is the grease in the gears that keeps goosing this thing on so that the inevitable collapse will be just that much deeper. (Oh, I guess this part of the rhetoric does stay the same.)