My friend (and co-author) Andy Reschovsky wins Steve Gold award

It was nice to read about it this morning:

University of Wisconsin–Madison economist Andrew Reschovsky will be honored in November with the 2011 Steve Gold Award, which recognizes a person who has made a significant contribution to public financial management in the field of intergovernmental relations and state and local finance.

The Association for Public Policy Analysis and Management, the National Conference of State Legislatures and the National Tax Association give the award each year in memory of Steve Gold, an active member of all three organizations whose career and life tragically were shortened by illness.
"I knew Steve Gold, which makes receiving this award even more meaningful," says Reschovsky, a professor of public affairs and applied economics in UW–Madison's La Follette School of Public Affairs. "As a public finance economist, Steve believed his role was to communicate to policymakers about research and analysis. His emphasis on the link between scholarship and practice and on policy-oriented work on public finance has very much influenced my career."

Boston Fed President Eric Rosengren on the need to facilitate refinances (h/t Kurt Paulsen)

He says at a meeting in Stockholm:

There are several proposals that attempt to facilitate refinancing for homeowners who have been negatively impacted by the drop in housing prices. These proposals do face hurdles, including how to address private mortgage insurance and second liens. However, a program that made it possible for many homeowners to refinance, even if they were upside down, would likely provide significant reductions in mortgage payments to individuals who are likely to have a relatively high propensity to consume. Clearly getting more money into the hands of homeowners who would spend it could help to fuel GDP growth. This would reduce one of the impediments to a more significant effect from the monetary policy actions taken to date.

I hasten to add that there is already a government program to allow underwater borrowers to refinance, the Home Affordable Refinance Program (HARP). This program allows underwater borrowers with Fannie Mae or Freddie Mac loans to refinance at lower rates. Unfortunately, the program has helped fewer borrowers than was originally hoped. Fed Governor Betsy Duke outlined some of the potential reasons why, in the talk I mentioned earlier. They include loan-level price adjustments (LLPAs) that raise interest rates for many borrowers and thereby reduce the benefit of refinancing; originator worries about “buybacks” forced on them by Fannie Mae and Freddie Mac; junior lien-holder resistance to re-subordinating their loans; and mortgage insurance policies.

The Federal Housing Finance Agency (FHFA) is now investigating whether there are ways to enhance the program to benefit more borrowers.[Footnote 15] As this work proceeds, I hope the FHFA considers dropping or reducing LLPAs in cases when a GSE loan is refinanced into another GSE loan. Such a refinance actually reduces the GSE’s credit risk (they already guarantee the existing mortgage and the homeowner will be able to take advantage of lower rates, freeing up cash flow).

Am I posting this because I agree with it?  Yes. 

Hard Choices

Los Angeles (and other large cities) have food deserts--places with limited access to fresh, healthful, relatively inexpensive food.  Low-income people living in food deserts are at a particular disadvantage, because they can't afford cars, and therefore often do not have access to supermarkets. A common hypothesis is that poor kids eat unhealthy food because they don't have access to healthy food.  (I think this is only partially true--kids also eat unhealthy food because they like it.  For that matter, I still love McDonald's fries, I just try to limit my intake, and am in part able to because I have access to better alternatives).

Tesco's Fresh and Easy, a chain that develops and operates small grocery stores that feature fresh fruit and vegetables at reasonable prices, has decided on a business strategy of locating in food deserts.  This is potentially a great thing for kids who live in these places (especially if Fresh and Easy can figure out how to take WIC vouchers).  But this begs the question of how they are able to sustain such a business model.  Two answers present themselves--they are a non-union shop, and they rely heavily on automation.  Specifically, Fresh and Easy features self check-out, and so the store doesn't have to hire checkers.   Self check-out also makes it hard for Fresh and Easy to accept paper certificates, such as WIC vouchers, as payment.

So the cost of Fresh and Easy is that it may drive down wages for grocery workers a bit, and it may reduce employment for grocery workers.  The benefit is that it gives low-income children access to reasonably priced, good quality, fresh foods.  My personal social welfare function says to me that feeding kids inexpensively and well dominates most other considerations, but let's not pretend that there isn't a trade-off.

Michio Kaku on CERN's Challenge to Relativity

In this morning's WSJ:

Reputations may rise and fall. But in the end, this is a victory for science. No theory is carved in stone. Science is merciless when it comes to testing all theories over and over, at any time, in any place. Unlike religion or politics, science is ultimately decided by experiments, done repeatedly in every form. There are no sacred cows. In science, 100 authorities count for nothing. Experiment counts for everything.

A reminder: Ronald Reagan raised capital gains taxes

The Tax Reform Act of 1986 actually did two things that required the affluent to pay higher taxes: it raised the effective tax rate on long-term capital gains from 20 to 28 percent, and it eliminated the ability to write passive losses against ordinary income.  This meant that after 1986, Warren Buffett's taxes would have been at least as high as his secretary's.  

Read Taylor Branch's Atlantic Piece on the NCAA

Let me pull out two paragraphs from the powerful story:

Educators are in thrall to their athletic departments because of these television riches and because they respect the political furies that can burst from a locker room. “There’s fear,” Friday told me when I visited him on the University of North Carolina campus in Chapel Hill last fall. As we spoke, two giant construction cranes towered nearby over the university’s Kenan Stadium, working on the latest $77 million renovation. (The University of Michigan spent almost four times that much to expand its Big House.) Friday insisted that for the networks, paying huge sums to universities was a bargain. “We do every little thing for them,” he said. “We furnish the theater, the actors, the lights, the music, and the audience for a drama measured neatly in time slots. They bring the camera and turn it on.” Friday, a weathered idealist at 91, laments the control universities have ceded in pursuit of this money. If television wants to broadcast football from here on a Thursday night, he said, “we shut down the university at 3 o’clock to accommodate the crowds.” He longed for a campus identity more centered in an academic mission.

and

“Scholarship athletes are already paid,” declared the Knight Commission members, “in the most meaningful way possible: with a free education.” This evasion by prominent educators severed my last reluctant, emotional tie with imposed amateurism. I found it worse than self-serving. It echoes masters who once claimed that heavenly salvation would outweigh earthly injustice to slaves. In the era when our college sports first arose, colonial powers were turning the whole world upside down to define their own interests as all-inclusive and benevolent. Just so, the NCAA calls it heinous exploitation to pay college athletes a fair portion of what they earn.

I love college athletics (I am thrilled that I have gotten to attend three Rose Bowls in which Wisconsin played) and admire many college athletes.  I not only envy their athletic prowess, I am amazed at the varsity athlete who can manage a B average in a difficult major while playing a sport.

But the NCAA system gives these athletes a raw deal.  Among other things, the system makes it difficult for athletes in revenue generating sports to get a real college experience--practice and games can leave students too tired to focus on class (yes, I know some athletes have no interest in class to begin with, but in my experience they are a distinct minority).  If the "pay" is supposed to be an education, the least we as colleges and universities can do is make sure athletes get one.

Allowing underwater borrowers to refinance could improve investors' Sharpe Ratio

Consider borrowers with 6 percent 30-year mortgages that are 20 percent underwater.  Assume that the probability that any one borrower will default in any one month is .2 percent, and that the cost of default to the lender conditional on default is 50 percent.  Assume that at the end of five years, any remaining long balance is paid off).  A security containing such mortgages will have an IRR of 4.83 percent (I am happy to share the spreadsheet for the details.

Now let us convert the borrowers into people with 4 percent mortgages with 20 year terms.  The payment from such mortgages will be essentially the same as before, and the mortgage balance will be paid off more quickly.  The good news for investors is that this lowers the probability of default; the bad news is that it reduces the yield before default.  Assuming default probabilities in any one month go down to .1 percent, the IRR for investors goes down to 3.45 percent.  This seems like a bad deal for investors, except that they will have more certainty about their cash flows; the standard deviation of their investment falls.  Because default is binomial, we can calculate that the variance of returns will be p*(expected loss)*(1-p*expected loss).  The variance of not refinancing is thus .0099 and of refinancing is .004975, which translate into standard deviations of .1 and .07.  Because the riskless rate is currrently zero, when we substitute into the Sharpe formula, we find

Sharpe no refinance = .048/.1; Sharpe refinance = .0345/.07. 

This is about .5 in both cases, suggesting that investors are getting the same risk adjusted return whether refinancing becomes easy of not, assuming the assumptions are correct.  I am not saying they are; I am saying that in making policy we need to think about these sorts of implications.