Some evidence about state government spending multipliers.

Three abstracts. The findings should give the pain caucus some pause.

Daniel Shoag:

The effect of government spending on income and employment is a central unresolved question in macroeconomics.

This paper employs a novel identification strategy to isolate exogenous and unexpected variation in state government spending. State governments manage large defined-benefit pension plans for which they bear the investment risk. Using a newly-collected dataset on the returns and portfolios of these plans, I show that the idiosyncratic component of their returns is a strong predictor of subsequent
state government spending. Instrumenting with this ‘windfall’ component of returns, I find that state government spending has a large positive effect on income and employment. Baseline estimates indicate that each dollar of spending raises in-state income by 2.12, and that 35,000 of spending generates one
additional job. These effects are not due to in-state investment bias, are concentrated in the non-traded sector, and are larger during times of labor force ‘slack.’ Finally, I consider how these results compare with the predictions of a standard macroeconomic model and outline which features in the model are
consistent with the empirical findings.

Nakamura and Steinsson:

We use rich historical data on military procurement spending across U.S. regions to estimate the e ffects of government spending in a monetary union. Aggregate military build-ups and draw-downs have diff erential e ffects across regions. We use this variation to estimate an open economy government spending multiplier of approximately 1.5. Standard closed economy estimates of the government spending multiplier are highly sensitive to how strongly monetary policy \leans against the wind." In contrast, our estimates "diff erence out" these eff ects because diff erent regions in a monetary union share a common monetary policy. This allows us
to better distinguish between alternative business cycle models. We show that our estimates are consistent with a New Keynesian model with GHH preferences. They are consistent with a small closed-economy multiplier when monetary policy is highly responsive (as in the Volcker- Greenspan era) and a substantially larger closed-economy multiplier when interest rates are less responsive (as at the zero lower bound).

Clemens and Miran:

Balanced budget requirements lead to substantial pro-cyclicality in state government spending outside of safety-net programs. At the beginnings of recessions, states tend to experience unexpected deficits. While all states ultimately pay these deficits down, differences in the stringency of their balanced budget requirements dictate the pace at which they adjust. States with strict rules enact large rescissions to their budgets during the years in which adverse shocks occur; states with weak rules make up the difference during the following years. We use this variation to identify the impact of mid-year budget cuts on state income and employment. Our baseline estimates imply i) a state-spending multiplier of 1.7 and ii) that avoiding $25,000 in mid-year cuts preserves one job. These cuts are associated with shifts in the timing of government expenditures rather than differences in total spending over the course of the business cycle. Consequently, our results are informative about the potential gains from smoothing the path of state government spending. They imply that states could reduce the amplitude of business-cycle fluctuations by 15% if they completely smoothed their capital spending and service provision outside of safety-net programs.

ASSA Interviewing Etiquette

Here is a suggestion for freshly-minted Ph.D.'s looking for Assistant Professor jobs: take time to at least glance at the web sites of the places to which you are applying.  Even in academia, people who are hiring you want to know that you have at least a little interest in the place where they work.

Apologies to Mark Thoma

I was sloppy in characterizing Mark's comments about Gene Sperling.  He writes:

I think this misstates what I have said. I posted something defending Sperling, and the claim that 

"their grounds are basically that he is a protege of Robert Rubin and that he took money to work (essentially) as a consultant for Goldman Sachs."

I didn't say he was a protege, and said nothing about the money, etc.

I did say that from a political view I thought the administration would be better off breaking its ties with the Clinton administration personnel, just as I said the same thing about Summers. But that is different from saying there is something wrong with Gene in particular other than the political baggage that comes with him.

Here is what I said specifically. First, I echoed a post defending him. Then, I said "I still think a break from the Wall Street connected side of the Clinton administration would have political value."

See: 

http://economistsview.typepad.com/economistsview/2010/12/who-should-replace-summers.html

Tim Duy had much more to say, but those are his words, not mine.

Goldman Sachism?

I enjoy Felix Salmon and Mark Thoma's blogs a lot.  In the last day, both have lamented the possibility that Gene Sperling might replace Larry Summers; their grounds are basically that he is a protege of Robert Rubin and that he took money to work (essentially) as a consultant for Goldman Sachs.

I suppose I should disclose that I once got to sit next to and talk with Gene Sperling on an airplane from Jackson Hole to Denver, and he struck me as a person of great intelligence and even temperament.  That doesn't particularly matter--it does matter, however, that the people who I know who know him also regard him as a person of great intelligence and even temperament.  Let me emphasize the temperament part.  He also pushed for the very good idea of imposing Pigou taxes on banks.

So far as I know, his critics do not suggest that he is really personally deficient, but that he is a problem because (1) he worked in the Clinton Administration under Robert Rubin and/or (2) he received money from Goldman Sachs.  To me, the first part is actually a recommendation, but I feel the need to comment on the second.

Goldman Sachs has done things for which it should not be proud.  Does that mean that anyone who worked at/for the place should be disqualified from government?  In its history, the Ford Motor Company has done unlovely things; Boeing has done some not-so-great things; I am not please at some of the things my one-time employer, Freddie Mac, has done.  This does not mean people who worked at Ford, Boeing and Freddie Mac should be disqualified from government.  All these places, as well as Goldman Sachs, have many intelligent, honest, capable people.

If you have a beef with the substance of Sperling, fine.  If you think Furman would be better in the job, that is fine too.  But guilt by association is just too easy, and has its own ugly history.

Top Ten Cities for Real Estate Investment (h/t Wisconsin Graaskamp Center and Francois Ortalo-Magne)

The Association of Foreign Investors in Real Estate surveyed real estate investors from around the world about places and property types.  Among other questions, they asked respondents to list cities that had the best prospects for commercial real estate.  The list:

1. New York
2. Washington
3. London
4. Paris
5. Shanghai
6. Singapore
7. Hong Kong
8. Madrid (!!!)
9. Sydney
10. Los Angeles

Urban recovery: Pareto improvement is hard

The first time I visited Pasadena, in 1980, the place was a bit down-in-the mouth.  The corner of Fair Oaks and Colorado (the heart of what would become Old Town) featured disreputable establishments, and many beautiful old houses had fallen into disrepair.  Air quality was dreadful.

Now, 30 years later, Pasadena is among the loveliest and most lively cities I know (it also happens to be where I live).  New Urbanists should love the place: pedestrians fill Old Town and, to a lesser extent, Lake Avenue.  The craftsman bungalows--the sort of houses that people like Andres Duany like to copy--have been restored to their former glory, and range in size from modest to obscenely large.  Air quality, while still not great, is much, much better.  One can see the San Gabriel Mountains every day.

This produces unhappiness on the part of Occidental College sociologist Peter Drier.  He writes:

New US Census data reveal a troublesome reality about the Rose City. Pasadena’s has become a tale of two cities — one that welcomes affluent residents and another in which middle-class and poor families are pushed out by rising housing prices. 

Pasadena officials like to boast about the city’s recent “renaissance,” pointing to the major (and expensive) renovations of City Hall ($117 million) and the Convention Center ($150 million), and the just-approved $152 million facelift for the Rose Bowl, as well as the addition of new condominium complexes and upscale stores. 

 But who, exactly, is benefiting from the city’s renaissance?...

...At the very top, the wealthiest 5 percent of Pasadena households — those with household incomes above $249,841 — have almost one-quarter (22.7 percent) of city residents’ total income. Only five cities – Los Angeles (25.9 percent), Glendale (25.8 percent), Rancho Cucamonga (25.2 percent) San Francisco (23.4 percent) and Oakland (23.1 percent) — have a higher concentration of income among the richest 5 percent.

 In contrast, the poorest one-fifth of Pasadena households — those with incomes below $23,042 — combined have only 2.6 percent of all residents’ income. As Table 2 reveals, only in San Francisco do poor households have a smaller share of citywide income.

In Pasadena, those in the next poorest one-fifth — those with household incomes between $23,043 and $45,174 — bring home only 7.6 percent of residents’ incomes. Together, the poorest 40 percent of Pasadena’s households have only 10.2 percent of Pasadenans’ total income.

...Pasadena lost 2,420 households with incomes below $50,000 — an 8.8 percent drop. By far the biggest losses were among households earning under $10,000. The number of these households fell from 5,273 to 4,094 — a 22.9 percent decline.

None of this should be surprising in light of spiraling rents and house prices, the accelerating conversion of affordable apartments to expensive condominiums, the predominance of new luxury units among the condos approved by city officials and the paucity of affordable housing in Pasadena’s development pipeline. 

So Peter underscores a fundamental problem.  We want out cities (and inner ring suburbs, such as Pasadena) to improve.  But when cities get better, they become more desirable places to live.  To use a metaphor, 30 years ago, Pasadena was a K-car, and now it is an Acura (one needs to travel south to San Marino for the BMW).  Consequently, when cities become successful, they tend to attract richer people and push out poorer people.  This is true in New York, San Francisco, London, Paris, and so on.


So whom does this help?  It certainly helps homeowners, regardless of income, because it leads to greater wealth.  The median person in Pasadena is a homeowner, but just barely; nearly 50 percent of Pasadenans are renters.  Because rents are higher, renters might appear to be worse off.  On the other hand, rents reflect desirability.  If the change of the value of the bundle of amenities arising from living in Pasadena is greater than or equal to the change in rents, renters are at least as well off as before.  Pasadena is cleaner, safer and healthier than in was 30 years ago, and these things are valuable.


The exception is those people who are forced to move because wealth prevents them from choosing to live in Pasadena.  Those who are forced out of their homes are worse off than before, and so a revived Pasadena is not a Pareto improvement (in the strict sense of the phrase) over dowdy Pasadena.


So what should we do?  Discourage the kind of renaissance that Pasadena has produced?  I think not.  I can think of three policy responses that might help.  First, make Section 8 vouchers and entitlement, so that people can choose to live in whatever city they like.  That is a federal responsibility.  Second, use Pasadena's relatively high property values (relative to other communities; not to five years ago) to improve social services.  But that is not possible to do without changes to Proposition 13 (parcel taxes are not as efficient or equitable as ad valorem taxes).  Third, get rid of regulations that make in extremely difficult to build inexpensive units, such as granny flats, in Pasadena.  This is the only lever than is in Pasadena's hands.


It is difficult to get around a very uncomfortable question: should all people have financial access to all communities?  As an economist, I tend to think the answer is no.  As a human being, I am not sure at all.

Looking for Information on Real Estate Market Conditions in Hyderabad

I will be spending a few weeks visiting the Indian School of Business at the end of January; in the past, I have gotten welcome comments on the market environment in Hyderabad.  Anything that gives me more context is helpful.