Does Modigliani-Miller apply to countries?

If it does, the capital structure of the US is just fine.  Current GDP is 15.8 trillion.  Let's apply a  real discount rate of 4 percent (which is probably high, given that the yield on 10-years TIP is negative), and assume a real long-term growth of 2 percent (which is likely low).  This means the country is worth about $316 trillion (this figure includes human capital as well as asset values).

Total debt outstanding in the US, public and private, is $55 trillion.  So we are about 17 percent debt funded, which means we are about 83 percent equity funded.  This should be OK.  What I am missing here?

(note: it was Matthew Yglesias' Slate piece today that got me thinking along these lines).

  

Steve Oliner shows that it takes too damn long to build things in California

The set-up:

Recent research, which I conducted with Jonathan Millar of the Federal Reserve Board and Daniel Sichel of Wellesley College..... presents the first comprehensive estimates of planning times for commercial construction projects across the United States. We analyze roughly 82,000 projects nationwide for which planning was initiated  between 1999 and 2010, using data obtained from CBRE Econometric Advisors/Dodge Pipeline. The projects in the dataset include office buildings, retail stores, warehouses, and hotels. About 95 percent of these projects involve the construction of a new building; the remainder are additions or alterations to an existing building or conversions to a new use.

They find that average planning time in the US for a commercial building is 17 months.   But the longest planning times are in California and the Northeast.  Planning times in some California MSAs are about a year longer than the national average.  This makes California's economy less nimble than others.

This is not about whether or not there should be strong rules to protect the environment--California needs such rules.  This is about making rules straightforward and predictable, and allowing economic agents to behave quickly within the rules.  My hypothesis is that it is California's clumsy implementation of planning, more than anything else, that puts it at a needless disadvantage relative to Texas.

It's the G.

After I saw the weak 4th quarter GDP number reported this morning, I went to the National Income and Products Accounts website, where I found that in the 4th quarter, government expenditures and investment has declined by 6.6 percent on a seasonally adjusted annualized rate and that defense spending had dropped 22.2 percent, again, on a SAAR.

Can this possibly be correct?  I am wondering if there is some anomaly in the data.

An update of my tinker-toy model of housing starts and GDP

We had pretty robust growth in housing starts in December:

A few months ago, I suggested that we could have second quarter GDP growth of 2.9 percent.  I am now revising that to greater than 3 percent growth (the point estimate is 3.2 percent).  We'll see how things turn out....

I didn't think Phil Mickelson's Tax Rate Could be > 60 percent

From the Tax Foundation:

Mickelson lives outside of San Diego so he is subject to one of the highest tax rates in the country, but it doesn’t appear to be quite that high.  Gerald Prante and Austin John total up all the top tax rates on wage income in the 50 states and they do find California has the highest at 51.9 percent:

"For example, the 51.9% top METR [marginal effective tax rate] for wage income in California for 2013 under the Fiscal Cliff scenario is equal to the 39.6% federal income tax rate plus the new 13.3% top state income tax rate in California minus the deductibility of state taxes against one’s federal taxes (5.27%) plus the marginal tax rate effect of Pease returning (1.18%) plus the current 1.45% Medicare employee tax plus the new 0.9% tax on Medicare plus the current 1.45% Medicare employer tax which we assume is borne by workers in the form of reduced after-tax wages. The sum of these tax rates, which equals 52.6%, is then divided by 1.0145 (1 + Medicare employer tax) because by assuming that the incidence of the Medicare employer tax is borne by workers, we must add back the employer contribution to the worker’s income. The final METR figure is thereby 51.9%."

It’s not clear how Mickelson is getting to 62 percent, since there is no other income tax at the local level in or around San Diego. 

London: investigation of luxury property Vatican

Saint Peter - vatican

ITALY - Sharp decline in sales and the housing market crisis black as evidenced by the data released by Fiaip.

From Bulgari shop on New Bond Street in a building in the sophisticated section of St. James's Square, at the corner of Pall Mall. Property have been discovered by the Guardian of the best quality (and price) in London are headed to the Vatican. 

In an extended report in the British newspaper says, nevertheless, that trace the true possession of luxury properties isn't very easy, as he writes, the Vatican uses a construction of overseas businesses and that the connections recognized in the demand by the newspaper to make known properties, have established the best to hold that information private.

 The Guardian goes beyond London and describes other equally renowned property and are headed to the Vatican, in Paris, for instance. It highlights that this "empire" has been developed through the years using, in beginning, the cash received by Mussolini as a swap for acceptance of the fascist regimen by the Pope's paper finally says that he approached concerning the apostolic nuncio in London, Archbishop Antonio Mennini, but didn't comment.

Real Estate in the Smart City

Improve the town to get to improve the quality of life of citizens: in summary, this is the principle behind the Smart City project, started by the Eu to promote the creation of shareholder virtuous among government, private businesses and research institutes, in order to give substance to plans that promote the sustainable improvement of urban centers.

Whether for purely historical, artistic and architectural, that for reasons related to management of the property usually controversial, afflicted with extreme superficiality and reckless urban expansion, going back to the time scale of economic growth after World War II), also think about defining a brand new Italian towns, can be an task challenging, but, however hard, it is clear that should be addressed when we truly want to make the journey to reside in urban areas more eco-friendly. Regarding Italy, the Lioness is, yes, distinguished by having been given a grant of 20 million - by the EU - to pursue "smart", but therefore far, nothing has moved to put at the center of 'attention to the problem of creating the town public and private, with a view to probable (and desirable) redevelopment to have, in fact, a "smart city".

And it is correctly to treat this absence that Editions 12 and head on the web BsNews, take the subject by organizing the meeting "Real house in the Smart City - Integration and Development", planned for Sunday, February 13, at the Teatro San Barnaba course Magenta, in Brescia, the debate will soon be divided in to two components (morning and afternoon), and give the possibility to hear and compare the points of view of the management and of local trade associations, figures entrepreneurship Brescia, and also experts from outside the state.

Upstream of, two objectives: the first is cultural, is to launch a brand new attitude on the section of individual citizens contrary to the building. The essential consideration is that if you really wish to are now living in a town more eco-friendly, it becomes necessary to be able to know the quality of the property, have knowledge that serve to find the home built with energy saving, have knowledge to be able to select the house that best suits your requirements and it's really up with the occasions, that's "smart".

Second intent behind the discussion is to generate problems for the revival building, a market that's certainly one of the foundations of the Italian economy, and Brescia in particular, and that is blaming them most seriously affected by the crisis. According to the organizers, the restart of the sector may well be the case if the administration intervenes to accomplish and improving neighborhoods where the majority of the qualities are not included in the canons of eco-sustainability, or where there is a top proportion of homes not in step with the situations, homes that, if we're to regard the setting, should be "scrapped" means everything to promote the private sector to spend money on recovery operations, or rather, "destruction", to make certain job opportunities and profits, while administration centrerebbe the objective of sustainable urban development, without any obligation should bear the costs.

Ultimately, the idea of the discussion is to provide the Smart City, the city ecological, realistic city, such as (complex) process to be completed by the action of directors who create the conditions necessary to make sure that producers have an incentive to participate in the recovery and in understanding - thanks to the systems and components of last generation - the existing building fabric.

Do higher marginal tax rates lead superstar athletes to play less often?

Let's think, for a moment, about why people want more money:

(1) To buy stuff.

(2) To keep score.

(3) To accumulate power.

Perhaps there are others, but these seem to me to be the big three.

OK, so there seem to be two kinds of athletes in the world (with respect to consumption):

(I) Those with entourages.
(II) Those without entourages.

It takes an entourage for superstar athletes to spend all the money they make--it would otherwise be hard to spend an eight figure money quickly enough (people can even afford private jets at those incomes).

So let's think about those with entourages.  If their taxes go up, they will actually have to work harder to keep their entourages.  That should mean they play more, not less.

For those without entourages, the marginal utility of consumption must be zero--this is the implication of not being able to spend all your money.  So their incentives must arise from reasons (2) and (3).

Scorekeeping is independent of taxes.  If an athlete wants to say he/she has the most winnings, they will have an incentive to play more games.

That leaves power.  Higher marginal taxes reduce the ability of high income people to accumulate power, which may mean they work/play less.  I don't know that this is entirely a bad thing. 

Morris Davis gives a talk where he shows that fewer American homeowners think they are underwater than actually are

Morris--along with Erwan Quintin--calculates median house prices by MSA using the American Community Survey from 2006-2010.  Because the ACS samples all houses, the change in price from year to year is largely not biased by the change in composition of the housing stock (the only change comes via new construction and home improvements--and the US had little of either from 2008-2010).  As such, the calculation, which is based on what people think their house is worth, is in some ways superior to house price indexes, which inevitably suffer from composition bias, even when their designers make admirable efforts to mitigate such bias.

In his talk, Morris showed that people thought the value of their houses went down substantially less than Case-Shiller implies.  Where Case-Shiller or people are right is not particularly important to mortgage performance, because people will not default if they think their house is worth more than their house.  Those who are forced to move for economic reasons might find themselves unpleasantly surprised, and may wind up selling (now) through a short-sale.  But it is possible that the reason many underwater borrowers are not walking away is that they think they are not under water.

City of New Orleans

In one of those lovely, serendipitous moments in life, I was flying over the Gulf of Mexico near New Orleans while reading Tom Fitzmorris's Hungrytown.  The city, alit at night, on the south bank of a black Lake Pontchartrain, looked beautiful, and the Fitzmorris book made me hungry as it relayed the history of the city's unique cuisine.

In the wake of Katrina, Ed Glaeser was pointed in his evaluation of New Orleans as an economic entity.

The 2000 Census reported that more than 27 percent of New Orleans residents
were in poverty (relative to 12 percent for the U.S. as a whole). Median family
income was only 64 percent of the median family income in the U.S.

In 2004, according to the American Community Survey, the unemployment rate
for the city was over 11 percent. And New Orleans’ housing prices, prehurricane,
remained far below those of the nation as a whole, providing further
evidence of weak pre-existing demand for living in the city.

By most objective measures, the city, pre-hurricane, was not doing a good job of
taking care of its poorer residents. For most students of urban distress, New
Orleans was a problem, not an ideal. Poverty and continuing economic decline
fed upon each other, delivering despair to many of the city’s residents.

In light of all this, Ed argued that providing cash to residents of New Orleans might be superior economic policy to rebuilding New Orleans.

Were he talking about any other city, I think Ed would almost certainly be right.  But somehow, it seems to me, if we were to have lost New Orleans, we as a country would have lost something beyond an economic agglomeration.  Its continuing contributions to American culture--through food and music both--have provided a positive externality to the remainder of the country that it has not been able to internalize through revenue, and the country owes it something for that.  Perhaps the cost of losing these contributions would have been less than the cost of rebuilding, but I am skeptical.

Eight million pounds in an ancient castle in Scotland (ghost included)

how much would you pay for a real ghost?

One of the oldest still inhabited castles in Scotland is on sale for eight million pounds, about 9.1 million euro. The Blair Castle located in Dalry, in Ayrshire, is a real piece of Scottish history, inhabited by the same family for nearly 850 years: the whole structure, such as a thousand acres of land owned are in perfect condition, without sacrificing modern conveniences, as the heated pool. The building dates back to 1100, a period in which it was made even the Norman tower, part of the family that Blair was given the title of barons by King William the Lion.

For those who are looking for real estate of great prestige, an ancient castle, in the countryside of Scotland, could be an ideal solution.

The two owners have decided to sell only because they spend a lot of time abroad, where he lives part of their family, and fear of not being able to keep in perfect condition.

There are days when I wish Wordperfect 5.1 was still around

That is all.

Economists and the public are both right about free trade

Noahpinion has a nice post this morning on how the public doesn't trust economists.  Exhibit A:

"Free trade" is the one issue on which economists - at least, American economists - famously agree. And yet, substantial majorities of Americans think that free trade has hurt them. In the Zingales paper, trade was the issue where there was the greatest divergence between economists and the public. How can the common people disagree so sharply with the overwhelming expert consensus? Are the common people simply a bunch of flat-earthers who refuse to look at the evidence? Or do they have a point?

The workhorse model of trade is the Heckscher-Olin model.   The model predicts that trade leads to higher output for the countries that trade.  I actually think that this is hard to dispute.  But the model also predicts that when a country opens up trade, its scarcer factor of production winds up worse off.  In the case of a capital intensive country like the United States, Heckscher-Olin predicts that returns to capital will rise and returns to labor will fall.  The return to capital rising is greater than the return to labor falling, so the size of the pie increases.  Nevertheless, without redistribution, trade makes labor (particularly unskilled labor) in the US worse off.

When the US was going through the process of trade liberalization, workers were promised that the damage imposed on them would be mitigated by Trade Adjustment Assistance.  To say that the program is too small to be effective is an understatement.  The only way to effectively offset the harm done to workers via trade is with redistribution that leaves workers at least as well off as they were before trade liberalization.  Note that such redistribution would still leave owners of capital better off than they would be in the absence of liberalized trade.

I continue to have the view that on balance open trade is a good thing--among other things, it almost certainly reduces the probability of war breaking out, and this is pretty valuable in and of itself.  But when many Americans think trade has made them worse off, they are not being unreasonable.

Why Moneyball and Nate Silver work, but derivatives don't

I find Nassim Taleb's style annoying, and he often mischaracterizes the views of others.  But when I teach my mortgage backed securities course, I have my students read the Black Swan because of an important point he makes (over and over again): some things are well characterized by distribution functions with small numbers of sufficient statistics (such as mean and variance), while other things are not.

With baseball and politics, we can fully characterize the distribution of outcomes (or at least come close enough to doing so).  With financial markets, we really cannot.  What is sad is that many people disdain  the insights of statistical inference when it really works; others embrace such inference when it does not.

Will we ever learn?

Is allowing banks to count Mortgage Backed Securities as capital really a good idea?

The V-shaped nature of the Fiscal Cliff Fix

Here is a first approximation of the change in effective tax rates [for a single taxpayer] as a result of the deal (the effective rates   are based on changes in payroll and income taxes).

The builds in a 2 percentage point increase in payroll taxes us to the income cap of $110,100, and a 4.9 percentage point increase in marginal tax rates above $400,000.  The rates actually rise a teeny bit faster for those above the $400,000 threshold, because the tax on capital gains is increasing by 5 percentage points, but this doesn't change the basic point of the picture, which is that it is not until income reaches around $560,000 that the change in effective tax rates at the high end of the distribution match the rate at the low end. [note: y-axis is the change in effective tax rates].

In the glass half-full department...

(1) Grover Norquist must be pissed.

(2) If I understand the deal, Mitt Romney's taxes go up by about 33 percent.

[update: GN says he is happy because R's voted for tax cut.  Oh well].

How we are not all in it together in a small, but perhaps meaningful, way

The Rose Bowl is not longer on ABC, but rather ESPN, meaning that for someone to watch the oldest bowl game, they must be able to pay for cable TV.

One of the cliches about sports that I actually believe is that sports provide something the CEO and Custodian can talk about, thus producing social cohesion across economic classes.  But for this to be true, it need to be easy for everyone to watch.