Justice

On Wed, I am having the screening procedure that Katie Couric so vividly demonstrated some years ago. Basically the story is that if you have this procedure at age 50, any colon cancer that might be detected will be at a sufficiently early stage for it to be quite curable. So because I have good health insurance, I can be sure I will not die of colon cancer.

Those without insurance are not so fortunate. Such patients can only get the screening if they pay out of pocket ($2000-$3000) or, if they are patients at places like the LA County hospital, if they are symptomatic, which means the cancer might not be caught early. For the median family, $2000 is a lot of money; for those who occupy the netherworld of having too much money to get medicaid but not enough to afford health insurance, it is even more so.

I hope the new health care system rectifies this. Under the old system, this difference in service delivery was unjust.

[Updates: First, I misspelled "colon," which shows that I should never write things while being reflective at midnight. Second, it is worth saying something about cost benefit analysis and screening--according to this source, the cost per life year is about $45,000, which seems like a good deal to me].

One more take on Kartik Athreya's critique of economics bloggers

Athreya is arguing that the blogosphere's various critiques of modern macro are being made by insufficiently expert bloggers using insufficiently rigorous arguments. As is often the case, the best rejoinder comes from Mark Thomaand I suppose I don't have much to add myself. (I would link to the essay, but it seems to be broken right now)

But George Akerlof did [have a lot to add], way back in 2006, during his American Economic Association Presidential Address. which was entitled "The Missing Motivation in Macroeconomics." I remember finding the piece enthralling (I know, we economists aren't supposed to use such emotion laden words), because it made the very simple but devastating case that when the foundations of modern macro (the independence of consumption and current income (given wealth); the independence of investment and finance decisions (the Modigliani-Miller theorem); inflation stability only at the natural rate of unemployment; the ineffectiveness of macro stabilization policy with rational expectations; and Ricardian equivalence) are tested against data, they generally fail the test. I remember at the time that some economists thought that Akerlof had taken leave of his senses (and some friends of mine thought I had taken leave of mine because I so admired the address).

But in the end, we should be respecting evidence more than clever theoretical edifices. And yes, Kartik, while I am not an expert in macro, I did have to slog through lots of OLG models and rational expectation models and real business cycle stuff in graduate school, and pass prelim questions on them, so I have at least some idea of what it is that I find intellectually unsatisfying. Akerlof's view, expressed before we had the financial meltdown, that we really need to start over with modern macro, has, I think, largely been vindicated.

Hard to believe

I was on the radio the other day, discussing the future of Fannie and Freddie, when another guest said that all we had to do was fully privatize the mortgage market for all to be well. I know that I can't expect everyone to be aware of the 1920s, but the period 2002-2006 was a period in which the "pure" private sector took away substantial market share from Freddie-Fannie, and look how well that turned out.

Of course in the end there is no such thing as a pure private market, because when large financial institutions get in trouble, the government comes to the rescue, either through an injection of funds or through extremely low interest rates. We are all GSEs.

Jack Guttentag found that mortgage rates in the 1940s were in the low fours.

Here is the link. [update: of course these were typically 20 year loans, so the comparison is not perfect].

Lisa Schweitzer on time-service quality trade-offs for transit and autos

She writes:

.

..People tend to like to separate travel time and service quality based on the arguments, like Litman uses, that the time in transit or walking is more pleasurable and productive than being in a car. But they are only right for people whose preferences align with theirs. For other segments of the mobility market, they are wrong. Moreover, it’s wrong to assume that these are the only things being traded: yeah, you hate to drive and you’d be happier not driving, but the extra half an hour that transit takes you means a half an hour you’re not with your kids, cooking, drinking wine with your spouse at home, watching the game, or any number of things you can’t do on transit, either. So yeah, I’d prefer to get the exercise walking than driving, but I prefer to spend the time cooking so that my kids aren’t sitting around hungry after school more than I prefer the exercise.

As she wrote this yesterday, I couldn't help thinking about it yesterday during my transit trip home. I take transit in LA every now and then, in part because that it the sort of guilty liberal I am. But yesterday, when all the stars were aligned (I arrived at bus from USC to Union Station at exactly the time in left; I only had to wait a minute or two for the Gold Line connection from Union Station to Pasadena), it took me just less than one hour to get from my office door to my front door. When I drive to work in the morning (at a strategic time), it takes me 20 minutes. When I return home in the afternoon (using surface streets until Hill or Figueroa meets the Pasadena Freeway), it rarely takes more than 35, and never more than 45. So my worst days in the car free up about an hour relative to transit. In case you are wondering, it is 11 miles from home to campus.

But don't I find driving unpleasant? Not really, I can plug my i-pod into my car stereo, or listen to NPR or the BBC, or a CD...In the morning, when traffic is clear, I get pleasure from driving my car at freeway speeds. I do miss the walk that I get when I use transit.

To some extent, the problem is that the street system in Los Angeles, with lots of redundancy, works too well. In Washington DC, Metro was a viable alternative to driving--it would often get me to work faster than taking my car. The street lay-out in Washington, set as it was in the late 18th century, was not designed to keep auto traffic moving. Metro is also very good--when people in DC complain how how awful it is, I want to laugh.

At the same time, I don't think a transportation system whose principal mode is people driving alone is sustainable. We need to think about some system in between driving alone and fixed route transit. It seems eminently doable to me, but it will take some imagination to make it work.

One more point about fixed-rate mortgages

They seem to be safer. From the Mortgage Bankers Association of America:

On a seasonally adjusted basis, the delinquency rate stood at 6.17 percent for prime fixed loans, 13.52 percent for prime ARM loans, 25.69 percent for subprime fixed loans, 29.09 percent for subprime ARM loans, 13.15 percent for FHA loans, and 7.96 percent for VA loans. On a non-seasonally adjusted basis, the delinquency rate fell for all loan types.

The foreclosure starts rate increased for all loan types with the exception of subprime loans. The foreclosure starts rate increased six basis points for prime fixed loans to 0.69 percent, 17 basis points for prime ARM loans to 2.29 percent, 18 basis points for FHA loans to 1.46 percent, and eight basis points for VA loans to 0.89 percent. For subprime fixed loans, the rate decreased nine basis points to 2.64 percent and for subprime ARM loans the rate decreased 39 basis points to 4.32 percent.

Some of this may just be that people who take less risk select themselves into fixed-rate loans, but even so....

Bob Hagerty blogs about Patrick Lawyer on Fixed Rate Mortgages:

He writes, in part:

Allotted only about 10 minutes to share his vision, Mr. Lawler....first made the obligatory statement that he was expressing his own views and not those of his federal agency. Yeah, right, I thought, and reached for my triple espresso.

But then Mr. Lawler launched a frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty. If more members of the audience had been fully awake at this moment, I feel sure that their gasps would have been audible.

Now, Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will move or die long before then. They love to refinance every time rates drop and then brag to their neighbors about how much they are saving per month.

What they don’t stop to realize often enough is that they are paying a very large price for that privilege– twice.

The context is important.  One of the reasons the 30 year fixed rate mortgage is ubiquitous is the United States may be the existence of Fannie and Freddie.  If we do away with FF, we may also do away with the 30-year fixed rate mortgage.  So let me defend the 30-year fixed a bit with something I wrote about 3 years ago:

The problem with advising people to use adjustable rate mortgages, however, is that ARMs give households liabilities that have short duration--that is, liabilities whose market value remains close to face value at all times. This is because the rates on ARMs by definition change to meet market rates on a regular basis. Houses, on the other hand, are assets with lots of duration. The services they give to homeowners (shelter and a set of amenities) is pretty much invariant to market conditions. Consequently, house values change with market conditions, such as changing interest rates.

Good financial management practice suggests that to minimize risk, the duration of of assets and liabilities for any institution, including households, should be matched. In the case of houses, this means that households looking to minimize risk should use a fixed rate mortgage to finance their house. There are exceptions--if one buys a house and expects to sell it in five years, a five year ARM makes lots of sense, because the duration of the asset (housing services over five years) and the liability would match.

This is not to say there is anything wrong per se with people getting ARMS, so long as they explicitly understand the risk embedded in them. But a principle I have been pushing for years is that if people can't afford a house with a fixed-rate mortgage, they probably shouldn't buy a house. It is one thing to have the option of the FRM, and then decide to take the risk of the ARM anyway. One of the nice things about the United States is that FRMs are easy to come by--this is not true in most countries around the world. It is something else to be forced into taking a risk in order to buy. Under these circumstances, buying probably isn't worth it.