November 27, 2008

On hiatus

Time for vacation.

Posted by scott at 08:06 AM

November 26, 2008

The Free Market

A lot of contemporary political wrangling revolves around whether the free market should be unfettered and allowed to determine what lives and dies in the economy. The alternative is typically posed as "regulation," whether in the extreme form of soviet-style state control of industry, Japanese-style industry-government cooperation, or the European style of state-supported industries that are occasionally nationalized. The argument centers around the power of the invisible hand of mass action to make better choices than government bureaucrats, who are inevitably portrayed as less competent.

The power of the free market methodology in turn relies not on the supposed omniscience or wisdom of the individuals participating in the marketplace, but rather in the notion that masses of individuals, each acting rationally in their own best interest will add up to the whole acting in the best interest of the greater society that the market is embedded in. There turn out to be two significant problems with this whole idea. The second issue is that there is no proof of the belief that the mass of individual actions does actually add up to the best interest of the society as a whole. This is a concept that needs to be taken on faith, if it is taken at all.

More interesting, to me, and more important, is that work in the new field of neuroeconomics, and its companion field, behavioral economics, is undermining the other underlying premise of free market capitalism. This new breed of economists is demonstrating, definitively in many cases, that individuals almost never act rationally in their own best interest. A very simple case in point is that for almost everyone, now is a good time to buy stocks. It has been shown time and again that over the long term, dollar-cost averaging (buying stocks low and high, on a timed program) provides results better than all but the very best stock picker, and that the typical stock picker (i.e., 95%+) performs worse than random chance by trying to time market ups and downs. Unless you are 60+ and planning to retire in five years to ten years, you should be staying in the market, but that's not what's happening.

Another interesting result from this new field are some studies recently reported in the NY Times regarding performance when bonuses were at risk. Contrary to conventional wisdom, performance of cognitive (that is, non-mechanical) tasks degraded with higher levels of bonus pay, and were at their worst when the bonus pay was at around 30% of annual compensation - the highest level tested in the study.

These two things, taken together, put a significant stick through the spokes of the free market wheel. Not only do market actors fail to act rationally, increasing their risk-based (bonus) compensation worsens performance. This explains an awful lot about Wall Street. In effect, the entire basis of the free market system is a myth, and as a society we need to do something about it. I'm not personally in favor of centralization and five-year plans, but I think it's pretty fair to say that risk-based compensation needs to be capped, and the behavior of actors in the free market needs to be regulated so that these irrational excursions are kept under control.

Posted by scott at 04:41 PM

November 25, 2008

Who Framed Rick Wagoner?

The City of Los Angeles - indeed, many American cities - once had an extensive surface rail system - the Pacific Electric Railway. Common lore holds that the Pacific Railway was destroyed by collusion amongst the oil, automobile and rubber interests, a story that was memorialized in part in Who Framed Roger Rabbit. As it happens, on the day that the railway shut down, there was a fire at one of the refineries in Long Beach. On that day, one of the men who ran the railway took some pictures, which he developed and made into slides, and those slides made it into one of the books of Americana published by Charles Phoenix. Curiously, when I introduced my wife, the artist Phoenix-Smith, to Charles, she was very taken by the art his slide collections represented, and got permission to make paintings from those works, and so hanging over my workspace at this particular moment are two paintings of the day the Pacific Electric Railway shut down, and it was truly a dark day.

I have always been a fan of rail, and these days I have the luxury of living in one of Northern NJ's train towns. New Jersey has an extensive system of commuter railroads running into New York City, and I have one of those railways literally in my back yard. I can leave my kitchen and be on the platform in just three minutes. And, on those occasions when I do drive, I have a hybrid Toyota Camry to do my driving in, and I take great joy in seeing just how few gallons I can use. I do indeed love visiting the gas station so infrequently that I forget where the fuel door release is.

So, you might think that I'm taking great joy at the spectacle of the modern descendants of the companies that drove the Pacific Electric Railway, the Key System in San Francisco, and other municipal railways out of business. After all, it has taken long enough for what went around to come back around.

And yet...and yet, maybe not so much. It's true that commuter rail is incredibly efficient at moving large numbers of people over moderate to large distances. Most of the systems that were destroyed, though, weren't commuter rail systems. They were trolleys, what we now call light rail, and in fact they were only as efficient as buses. Moreover, all it takes to change a bus route is a few signs and benches, some new schedules, maybe a new bus or two if the route is much longer. Trolley systems are great in downtowns where the geography is fairly fixed, such as tourist areas, but in areas where commerce, industry and residential zones ebb and flow, buses do in fact make a lot of sense. So, it may be that the old urban railways were on the way out anyway, and we don't need to invoke a conspiracy to explain what could have just been about efficiency, flexibility and cost-effectiveness.

Still, the Big 3 have done some awfully inane stuff. While other companies made it their business to figure out what people wanted and to make that, and to make it well and make it cheaply, the Big 3 decided that what they wanted to do was build big cars and trucks with big profit margins, and run lots of ads to convince the gullible that what they wanted was big cars and trucks that use lots of gasoline. I'm sure that the oil companies were very grateful, but apparently not grateful enough to rescue the car companies now that things have gotten tough.

Really, the question is, have they been bad enough to deserve to die. My answer is, well, probably. I think that the upper management, such as Rick Wagoner, GM's CEO, needs to be shown the door sooner rather than later. I think that if the US is going to buy GM for its $2 billion market capitalization - and we could probably buy it cheaper in bankruptcy court - we need to throw the bums out. Letting the companies die might be emotionally satisfying, and it might satisfy a few rabid right-wingers who think that the free market demands it, but it would throw an awful lot of havoc into an already-fragile economy.

After all, look what happened when Henry Paulson gave in to this "let 'em fail" impulse. Lehman collapsed and the waves swamped AIG, WAMU, and how many others? GM was the largest industrial company in the world at one point, and we already know that its supplier network is fragile. If GM goes, companies collapse downstream, dealers collapse upstream, pension and health benefits collapse and the Pension Benefit Guarantee Corporation - which is us, the taxpayers - has to clean up billions of dollars of mess anyway. We just need to be sensible about it, admit the economy can't afford another Lehman, and take the car companies over.

Goodbye, Mr. Wagoner.

Posted by scott at 09:11 PM

November 24, 2008

Oil and Gas

There's something almost primally satisfying about the merry whistle of steam heat coming up, a feel of moist heat pervading the space. It's sort of like the sauna, only not nearly as hot and a lot more whistly. It's pleasant to come home and say to myself, "Hey, I can afford the $3 to run the heat to warm the house up this evening," and the resulting heat is very pleasant.

See, the thing about living in the Northeast is that it gets cold. NJ is fairly mild by comparison to places like Vermont or Maine, but it's getting down in the 20s this week, and the coldest nights last year were in the teens. So, to one degree or another, you have to have heat, and the computers in the study don't exactly throw off enough heat to warm the house. Now, one of the nice things about living in a multifamily dwelling is that you can mooch heat off the neighbors, but if everyone does that, everyone freezes. So, even if you can get away with not running the heat some of the time, you have to give in and run it occasionally.

Even so, I run the heat as little as I can, as we heat with good old-fashioned fuel oil here in this house, and not only is it not particularly cheap, there's a tendency for it to arrive in truckloads in scary quantities with frightening prices tags. Still, I'm lucky - I didn't prepay an oil contract this past summer, when crude oil was $143 a barrel, so with any reasonable luck I'll be paying much lower prices as the winter wears on. However, fuel oil demand is somewhat inelastic - it doesn't change much with price, because it's a bit of a must-have - and my supplier may well be locked into high-price contracts, bought when it looked like the price would go nowhere but up.

And, truth be told, in the long term, the price of oil will do nothing but go up. We've used up all of the cheap oil, starting in the days when oil was just lying on top of the ground in Pennsylvania (why do you think the motor oil brand is Penn?) and now we're working on the moderately hard to get oil. It's deeper, spread around further, under the North Pole(!) and of course in the wilderness in Alaska. In Canada, they're mining the oil sands, where they basically have to boil oil out of the sand in order to get something usable, and in Colorado they want to tear apart mountains that are made of oil shale, which is porous rocks with oil in the pores. This is not cheap, people.

It gets worse. Right now, demand is dropping because people have finally noticed that we're in a recession - which really started around the beginning of the year - and so the price of oil is headed down. This is nice in the short term - gas in NJ is the cheapest in the country and I just saw $1.799 on a sign - but we'll have to pay for it in the long term if we want to keep using oil. If we need the oil to lubricate our economy, we need to start developing those expensive reserves now, but the problem is that it costs about $70 a barrel to do so. With oil under $50 a barrel, nobody is going to do all of that expensive work. That means that when the recession end and demand comes back, the price is going to shoot up like a skyrocket.

Aside from the problems that will cause for people on a personal basis, that kind of rise in energy prices - since oil substitutes like natural gas will rise along with oil - is going to put a big crimp in recovery. Just as people start feeling a little flush, get a little confident in the economy, here come more record-breaking oil industry profits, gasoline at $5, $6, $10 a gallon, food prices shooting up again. Right now, we have so much structural damage that the oil price spike over the summer just kind of tipped things over the edge. In a year or two, during a modest recovery, a shot of that same medicine could be enough to stop the recovery dead.

Is there a cure? Well, yes and no. Oil prices are going to go up even if we magically make the US independent of oil, because the rest of the world is still highly dependent on oil, and China and India are industrializing and building consumer economies that are using more gasoline. However, we can certainly make it either worse or better with the decisions we make over the next 6-12 months, and I certainly hope that our new President and Congress make the right decisions. We need more sources of energy and we need them soon. As for me, I hope that by the time oil prices head back up, I'm living someplace where I can put in something a little more modern than oil.

Posted by scott at 08:07 PM

November 21, 2008


I recently moved back to the East Coast from California, and for the first year or so I saw the world with a curious sort of double vision, as my childhood memories were a sort of layer over the world I was seeing as an adult. As a child, I took a lot for granted, so seeing the same thing at the same time with adult eyes and my eyes as a child created an odd sort of perspective in which I not only saw things, but really began to think about them in a different way. The thoughts were not just different from those of the child, but also different from the way I had thought about the world in California. One of the things I started to see here in the Northeast was that favorite of wonks everywhere, infrastructure.

Infrastructure refers to all of those made things that make our world possible - not just the visible like roads and bridges and buildings, but the unnoticed like power lines and sign posts, and the hidden like buried water lines and sewer pipes. In the Northeast, much of the infrastructure was built around 100 years ago, and it shows its age. Also, by contrast with California, where the car is paramount, there is a relatively high density of public transit - bus and rail - even outside of New York City proper, as well as the enormous public transit system in the city. In part, these transit systems are made possible by the population density, but it also works the other way - the transit systems make a higher population density feasible here. In fact, even with the high density and transit, the area I live in, in Northern NJ, does not feel dense at all. It isn't until you pay attention to the housing infrastructure that you realize just how many people live around here.

One of the things about infrastructure is that if you look at it with the long perspective, the perspective of history, you can begin to see that we humans have been building stuff for a long time. If you look at it with the perspective of biology, especially the biology of social animals, you think, gee, that's nothing special. After all, termites build cities, and bees build hives and so on. On the other hand, bower birds build nests to attract mates.

And I find that an interesting thoughts. We tend to focus on infrastructure because of its social utility, but if building cities were all about social utility, they would be uniform, drab, and dare I say it, socialist. They would be the dreaded socialist worker housing - a long-gone trend in architecture, thankfully. Instead, if you look at the buildings from the heyday of the American skyscraper - the Empire State Building and the Chrysler Building - they are ornamental, playful displays of power and capability. Each city, when it builds a new World's Tallest Building, tries to come up with something showy - something with a personality.

In a sense, then, infrastructure can be looked at not as a social utility, but as a societal display - a shared work of art, if you will. If you look at the people who build buildings - not the promoters who finance them, or the architects that design them, but the people who actually make them, with their own hands, what are they thinking? Is it "just a job," or, as seems likely to my admittedly biased self, are they not proud of their work. Do they point to the building with their children and say, "I built that." I am sure that they do.

And really, that's something that's being missed in our post-industrial service economy. There are people who build, people who make. They don't build things and make things because they're not competent to do something else. They make things - goods and infrastructure because that's who they are. They are people who build things. When we restructure our economy so that we don't build and don't make, we aren't just depriving Americans of jobs, we are depriving them of the way that they are hard-wired to be, to actualize themselves. People are different. Not everyone is an artist or a musician - some people are, most aren't. Some people are makers, and when we talk about industries and bailouts, we need to realize that the best way to have a functioning and diverse society is to make space in it for everyone, even (and especially) those who make things.

Posted by scott at 09:52 PM

November 20, 2008


Wow, it's freezing out - literally. Last Saturday was 70 degrees, now we've got freeze warnings and a few snowflakes drifted by this morning. Global warming sure has our normal weather patterns on the run. One of the most important tasks for our society in the years ahead is to get a handle on that we're doing to heat the climate up. If we don't it's going to just get warmer, and history teaches us that when the ecology changes, species die out.

Now, I'm not implying that humans are likely to die out as a result of global warming. In fact, I think it's pretty darn unlikely. What I do think is going to happen is that people are going to start moving around more. It may be called chasing job opportunities, the country going to the city, or whatever, but by and large there's going to be a population shift from the warmer climes northward. It will get harder to grow traditional foods; crops will fail, pollinators (such as bees) which are already stressed will get even worse and may collapse, and people will adapt by moving out of the old spot and into a new one. We're already seeing a significant species shift in a food plant here in the Northeast. The sugar maple, long a staple of Vermont industry, is dying out in Vermont, and production is moving north to Canada.

The thing about migration is that on a long-term basis, no "civilized" society on record has ever successfully resisted a major migration. ("Civilized" here means that they left books and records documenting the migration(s).) The fall of the western Roman Empire didn't come about because an organized national or imperial enemy fought a military campaign and defeated Rome's legions. No, what happened was that people moved around the Asian steppes, and the losers were pushed into Europe with nowhere to go except into Roman territory, so as a result the Huns, Vandals and Goths brought a mighty empire down. And these were the losers, but it may be that they had the strength of desperation.

Now, there is one society that has some sort of record of success in dealing with incoming migrations. That is the Chinese society, which dealt with various waves of invaders by assimilating them. You could argue that they were unsuccessful in dealing with the various Europeans in the 19th century, but the Europeans weren't migratory - they were military adventurers imposing temporary outside rule. There are definitely some interesting lessons in the Chinese example for societies that are looking how to deal with incoming migrations and still maintain social cohesion, but that's not really what I'm talking about today.

Instead, it's important to consider what migration means. It doesn't just mean immigration in the conventional sense, in which mostly poor people slip across a border and try to fit in. The sort of migrations that global warming will be causing are going to include some significant clashes, simply because leaders aren't going to sit quietly while their population leaves (or starves). It's not that likely that the United States will invade Canada - Canadians are too nice, they'll just take us all in. However, the most fertile parts of China are mostly in the south of the country, and as those become more prone to drought, and as Siberia becomes more temperate, it's likely that the Chinese government of 50 to 100 years from now is going to be very interested in what is now very empty territory, and China is going to be one of the most powerful countries in the world.

Likewise with India, except that they have a very forbidding northern border. If I were to characterize the military that would make those two countries most secure and successful in the second half of the 21st century, I would expect China to be the predominant land power, and for India, in a fit of irony, to rule the sea.

Posted by scott at 09:44 PM

November 19, 2008

Fair Pay for a Day's Work

Money, at its base, is slices of people's lives. Even if money grew on trees, there would still be value added by the time spent in the act of picking it. Barter, the basis of trade before money was invented, required a more-or-less immediate exchange of value - I give you these melons now, you give me those sandals now - and made complicated exchanges difficult. If all you have is melons and all you need is a shoelace, just how many slices of melon equate to one shoelace? Money allowed for time-deferred exchanges - you give me money for my melons now, I give you money for some sandals next month - and for exchanges that recognized that the same amount of work by one person, whether because of skill or scarcity of materials, could produce an end-product that was more valuable. Even though money represents hours of people's time, not all hours are created equal.

There are a lot of things that factor into how different hours are valued. Work that anyone can do and that nobody minds very much isn't valued highly, because there's a lot of competition to do that work. On the other hand, even some highly-skilled work, work with few competitors, can be given a low value if nobody wants the work output. There's a reason all of those buggy-whip makers went out of business with the arrival of the automobile, and it has nothing to do with their skill. And still, there is work that must be done, that few people want to do, and still isn't valued as highly as the lack of competition would make it seem. For example, the average septic tank cleaner takes home roughly the American average salary - not exactly a big premium for mucking out human wastes. One of the hidden impacts on how we value work product, something that probably isn't featured in a lot of economics texts, is the prestige of the work. We'll pay a lot more than someone would otherwise appear to work if we're someone convinced that person is special.

By that criterion, every ordinary CEO in the US must have disappeared over the last thirty years, because CEO pay has gone up from 35 times the average worker's pay, to about 350 times(!). In other words, in 1978 firing the CEO would save 35 regular workers' jobs; in 2008, 350. Just bringing the gap to 1978 levels could save 315 employees' jobs. Just what are all of the CEOs doing to justify a ten-times pay raise over the last thirty years? Keep especially in mind that the average worker's salary has stayed basically flat over this period.

Well, based on recent history, it seems that what CEOs do best is destroy their companies and lose money. If that's the case, I'm having trouble seeing the value in that work - I'd be willing to do it for the 1978 pay level and I know people who would lose money for free, my ex-wife being one of them. Obviously, today's companies are not each an individual somehow ten times more valuable or ten times more profitable than they were 30 years ago, so something else must have changed.

One of the big changes is the prestige factor. A lot of CEOs think that they're superstars, and since their boards of directors are composed largely of other CEOs, CEO-wannabes and CEO fans, the boards go along with that. Now, largely this is a delusion. There are some CEOs who have built major businesses from nothing - Bill Gates, for example, or Brin, Page and Schmidt, but by and large CEOs are a bunch of gladhanders who are much more full of themselves than reality supports. Certainly, the CEOs of Lehman Brothers, Goldman Sachs, Merrill Lynch, et al. don't deserve what they've been paid and really ought to give it back.

A lot of folks have been talking about this for a long time - CEO pay discussions were on the radar during the dotcom boom, for example, and probably before that. To date, relatively little has been done about it, and probably little will be done about it as long as corporations can keep it that way. It will take government intervention to make any real change, and business will cry and complain about the "heavy hand" of regulation if the government takes away their toys.

What to do, then? There's really little that can be done by anyone by government, so perhaps best to brainstorm solutions that use a lighter touch. For example, someone who is a great innovator, who invents something substantial and makes a huge profit off of it, it probably isn't that unreasonable for them to take home a big wad. On the other hand, if someone comes into an established business, strips it, pumps and dumps the stock and walks off with money that really belonged to the business, that person should be penalized. Were I created a solution to this problem, I'd be looking at what I could do with the tax code to strongly incent corporations to spread executive pay over a number of years - high taxes on immediate compensation, but a sliding scale for putting this year's pay off until 3 to 5 years down the road, for example. This way, someone who does a good job, making the company healthier for the long term, can still see value from the work, but someone who destroys the company to rip an immediate profit from it, won't.

Posted by scott at 08:31 PM

November 18, 2008

For the Birds

Birds sing for a lot of reasons. That we know of, they sing to mark territory, to warn of intruders, to attract a mate, and very probably for the sheer joy of it. The odds are high, awfully high, though, that never once has a bird song because it had a recording contract, a big advance, and a tour. If someone were to go out in the woods and record some birdsong, we'd laugh at them if they tried to claim that they owned the song, and doubly so if they tried to stop someone else from recording those same songs.

Yet, for some reason, we tolerate exactly that behavior from record companies. Curious, isn't it? I'm sure that some of the singers will tell you that they wouldn't sing if it weren't for the money...and for every one who said that, there'd be ten who'd say it was "for the chicks." (Or whatever floats their boat.) My bud back in high school who was in a garage band - come on, even though their Robert Plant was half-credible, there was no way they were playing those instruments because they had a recording contract.

Being in a band actually works very nicely as a fitness display. Not every human endeavor is about who is stronger or faster or meaner. We're social animals, and there's nothing like a good display of social behavior to show off to the opposite sex what a great catch we are. A band of musicians, well, first off they have to have enough social skills to actually be a band. Oh, and they have to play music, and if you think that's easy, you've never tried. And then there's that whole business about being in key, and being in the same key as the other musicians, and all of that tempo stuff, and pretty soon you're talking some pretty significant brainpower just for three or four guys and gals to actually play music that someone else has composed. Once they've mastered those skills, then it's on to learning the next song, then all of the organizational skills in putting on a show, getting an audience to show up, and it may even be that as they sing they're going to dance to the music, and now you're showing not just the fine coordination to play an instrument, but general health and athleticism.

So, really, the reason the band gets some good nookie? It's because they're earning it. Yeah, if it's a typical fraternity party, the frat boys have gotten good and stoked while the sorority girls have gotten stoked up, so the only eligibles left upright are the members of the band, but still, the band would not look at all attractive if they weren't showing it.

Now, this doesn't mean that the entire world's body of art is worth nothing as long as the artists got some. However, come one, $150,000 a song to some bunch of suits who had nothing to do with the process except that they provided a microphone at the right time and place? That's as ridiculous as the guy out in the woods listening to the birdies calling him cheap, cheap, cheap.

Posted by scott at 08:00 PM

November 17, 2008

A Home of Your Own

Back in the 1990s, the world seemed to go nuts - well, a small bit, for a while anyway. We had the dot com boom, and for a while it seemed like all you needed was a website and sock puppet and you too could be a millionaire for a day. The air was heady and anything seemed possible, with that frantic feeling you get when you know that a disaster is bearing down on you. And, during the presidential campaign of 2000, the slow-motion disaster started. In March/April 2000, the NASDAQ market peaked, and the expected an inexorable drive down started. Your humble correspondent went from pretend millionaire to unemployed and seemingly unemployable in the space of two years. Some one million tech workers, nearly 10% of the boom-time work force, lost their jobs in the collapse.

In order to avert a national recession, Alan Greenspan, then the head of the Federal Reserve, implemented a series of moves to pump the economy back up. Basically, he used the Fed's one basic tool, its control over a specific interest rate, to push interest rates down through most segments of lending. This had two effects: the major one, of making it cheaper and easier to borrow money, and the seemingly minor effect of reducing the payout people could get from the normal sorts of safe investments retirees and pension funds go for - savings accounts, government bonds of various sorts, blue chip stocks and the like. With interest rates cut to the bone all over, this class of investors was not able to get the sorts of returns that they would normally see.

This would not necessarily have been a problem, except that in the aftermath of the dotcom collapse, in which many people and institutions lost a bundle of money, these sorts of investors were now looking to make up their losses. Pension funds, school boards, municipalities and states funding retiree benefits, all were looking for higher returns on their investments to fill in the hole. For governments, the dotcom collapse had been a double whammy, because not only had they lost money on supposedly-safe technology stocks, they also lost the taxes that they had been collecting on the private and public sales of those stocks, the capital gains taxes, income taxes and so on.

So, in the aftermath of the 2000 bust, there was a hunger for higher yields. Fortunately, or so it seemed at the time, there were new tools to generate those desirable yields - securitization, derivative instruments and the like. Ordinary loans could be bundled into groups and then sliced up into layers. The safest layers had stronger payback guarantees but got less of the interest payments; the icing was that the most risky layers got more interest money - more return on the investment. What was best of all for the bundlers of these securitized loans is that, aside from the fat fee they collected for creating the bundle, they could have the entire bundle rated based on safest part of the loan, not on the riskiest bit. As a result, securitized mortgage bonds carried AAA ratings, the highest the raters gave, basically independently of the underlying mortgages. This was the first breakdown in the mortgage system.

These AAA-rated high-yield bonds did what you would expect - people who needed to put money into safe investments that would help them make back what they lost in the last collapse flocked to them. Not only did individuals sign up for them, but also major institutions that looked no further than the AAA rating. After all, if it was good enough for Standard & Poors or Moodys, it was good enough for them.

All of this money flooding into the credit markets in turn did what basic economics teaches us. Lots of money plus a fixed supply of goods (in this case, houses) equals inflation. Starting in 2001-2002, housing prices took off like a cat with its tail on fire. It didn't matter what the house had sold for, what normal price rises looked like in the market, how much people who worked in that city or town or neighborhood made and what they could afford, house prices doubled. All of the sudden, your basic three or four bedroom family home was going for double what it had just five years previously. And, for some reason, everyone thought this was OK. As a matter of fact, everyone thought it was peachy keen. Realtors saw their commissions double for doing no more work than they had in 2001, homeowners saw their home turn into an endless piggy bank that somehow they'd never have to refill, and the powers that be saw the wheels turning and all was good. Even appraisers, who should have had some sense of history, some rules of thumb for valuing homes, signed off on the new valuations, disabling another key check on the mortgage market. This was the second systemic failure.

Now, it so happens that there is a basic rule of thumb for knowing whether housing prices are reasonable or not. It's called the rent ratio, and what you do is you find out what the house - or a same-sized apartment - would rent for per month, and you multiply that by 180. That's what that house should cost, give or take one year's rent (monthly rent times 12). This rule has been good all over the US for a long time, and the nice thing about it is that it works for each neighborhood. You don't have to look at what some house sold for two towns over - because there's no other similar house closer - and try to guess whether that town and your town cost about the same, have comparable neighborhoods, and the like. Now, realtors don't like to talk about the rent ratio, at least not with buyers and sellers, because they like to pretend that pricing a house is a big secret that only they know. But the fact of the matter is that this works...except during a bubble. During the bubble, houses were going for up to 288 times the monthly rent, or 60% higher than they were worth.

So, appraisers, bankers and the ratings agencies should have been watching the rent ratio when they were writing and approving mortgages. But they weren't and so prices got way out of whack with values. Now, buyers have figured out that something is seriously wrong, and they're waiting for prices to drop. They'll come back down to the historical rent ratio, maybe even a little lower due to overshoot. Until then, they are going to drop - it's inevitable, and those who talk about stopping it, about getting house prices back "up to where they belong," well, they're don't know what they're talking about. There is one, and only one, way to push house prices back up to 2006 levels, and that is to have massive inflation in wages, prices and everything else. Otherwise, it's back down to 180 times rent, and the mortgage holders just better adjust to that reality.

Posted by scott at 08:00 PM

November 16, 2008

Here comes winter

Today is a good 20 degrees colder than yesterday. So much for global warming...except that's not how it goes. Heat is energy, and the climate is a system driven by that heat energy. If you put more energy into a motor, it doesn't simply get hotter - it runs faster, and if you overdo it, it burns out. Likewise, the atmosphere is a heat-driven motor, and putting more energy - more heat - into it makes it run faster. In this case, it oscillates, running between hotter than normal and colder than normal in quick succession. Sure, over the long term, the overall trend is upward (warmer), but over the short term you get more both more colder days as well as more hotter days.

27 years ago, when I left New Jersey for college, we had just experienced a horrendous winter - 3 blizzards that dropped a foot of snow each time. I could not wait to escape to California, and escape I did. California, in the meantime, was experiencing increasing series of droughts, changing the weather there as well. As a non-native, my ability to see the changes there is limited, but I did still see changes in the 9 years I lived in California's Central Valley, as winters became milder and even the infamous Tule (pronounced 'too-lee') fogs became less dense and much more driveable. Even just from 2003 to 2005, the winter fogs I drove through each weekend became much less severe. At the start of that period, if I wanted to drive up CA-99 I needed to find and tailgate a big rig; by 2005, that was no longer necessary.

Getting (or coming) back to New Jersey, when I arrived here last year I had certain expectations of the weather and the seasons formed during my childhood here. I expected that summer would be hot and painfully humid, autumn would be crisp and colorful, and that snow would be on the ground from January into March. I've since experienced two summers and am finishing my second autumn, and things have changed so much in the intervening years. Compared especially to the 100+ degrees of a California inland summer, the occasional day in the 90s is no challenge. During this most recent fall, the trees did not seem so much to cycle through normal color changes as either resist changing entirely - there were still green leaves on some trees yesterday, while others were bare - or go straight to brown, skipping the reds and yellows. Even last winter was nothing - it barely snowed at all.

That the globe is warming is pretty much a an accepted argument these days. About the only people who don't accept it are living in caves, away from the increasingly disrupted economic cycles. The argument has moved now from whether to why, to whether human activity has disrupted the climate or whether this is a natural weather cycle. This is an area that's not amenable to true certainty, but for goodness' sake, if it's us that's causing it, we really should stop.

What we are most likely doing to make this happen is our inefficient use of energy. Not only are we as a national society digging up and using up a lot of old stored sunlight, but as a world society we are releasing gases into the air that have been buried in the ground for a long time. Additionally, we are processing materials through herd animals and producing greenhouse gases - the "bovine flatulence" problem. In short, not only are we using up stored energy that we'll never have back, we're being disgusting wastrels with it. Our cars, our homes, out businesses, all of the ways in which we use energy are terribly inefficient. There's no excuse for 12mpg sport-utility vehicles except that non-competitive auto makers created and exploited a niche in making these crazy things.

In addition to changing the energy basis of our society, then, we need to get serious about being efficient with that energy. This is not a matter of "personal virtue" - and what's wrong with being virtuous, anyway, that someone can think it's an insult? - this is a matter of getting the biggest bang for our buck, and for minimizing the mess we're making of our world. Sure, I don't want the winter of '79 back again, but I'd sure like to not lose the blazing colors that Northeastern autumn is justly famous for, the days when every leaf is a flower.

Posted by scott at 04:39 PM

November 15, 2008

An ordinary day

It's a perfectly ordinary Saturday afternoon. Except that it's not. It's November in New Jersey and the temperature is in the 60s. The economy is in the toilet and we've just elected Barack Obama as President of the US, a milestone as momentous as anything I've seen since Neil Armstrong took his step onto the moon.

When Armstrong walked on the moon... When what was good for GM was what was good for the country. That may still be true, but not in the way that was intended at the time. Now GM, once the titan of the worldwide auto industry, could be bought and sold by Microsoft, Apple or Google with the money they keep in the bank for a rainy day. Now GM, Chrysler and Ford, the backbone of US industrial might, are beggared by the poor decisions and shortsightedness of their management teams. Let's face it - if those companies had been building cars that people wanted, instead of making people want cars that were and are bad for them, the environment and the country, GM wouldn't be near death and it and Chrysler wouldn't be knocking on the federal government's door for a handout.

Still, as a society we need to be concerned about our long-term health and security, economic, environmental, and, dare I say it, even military. The US can't be in the business of making up fancier and fancier ways to gamble money and remain a going concern. At the base of it all, we need to grow things, we need to make things, we need to invent things, and as the basis of all of those things we need energy. We need energy to run our economy, to heat and cool our homes, to cook, transport and grow our food, to transport our precious selves about, to entertain, inform and educate. The basis of all life is energy, and we've been even dumber about energy than we have been about cars.

Ever since the dawn of the industrial revolution, what we've done is dig up old stored energy. It was cheap, it was easy, and our ancestors can be forgiven for thinking that it was relatively safe...except to the coal miners, and oil drillers and all of the other people who died extracting fossil fuels from the ground. The thing about fossil fuels is that drawing them down is like taking money out of the piggy bank. Sooner or later, you're going to pull that plug out of the pig's belly and nothing's going to come out, no matter how you tip the pig. Sure, we can look to extract oil from rock, from sand, from beneath the north polar icecap, and we'll find some. It will be harder and more expensive and the price will head back up as soon as the buyers get over the shock that Americans would rather drive less than pay $4/gallon for gasoline.

We need to start tapping the energy that streams by every day. People talk about fossil versus wind versus's all solar. The sun's been shining on the earth for 4 billion years, give or take, and for about 3 billion of those plants have been taking that sunlight and making more plants. The plants die, fall to the bottom of the ocean, get pushed between continental plates or whatever, get seriously smushed and turn into black stuff - chunks that we call coal, goo that we call tar and liquid that we call oil. We dig it up or drill for it, whatever bits the intelligent dinosaurs didn't use up before us, and burn it. It's really kind of silly when you think about it. There's all of that fresh solar power out there every day and we go to all of the trouble to dig up stored solar power from umpteen hundred million years ago. We need to get serious about cutting out the middleman (or dinosaur or whatever other intelligent critters have been here before us) before it's too late.

President-elect Obama wants to build infrastructure. He's darn right about that, and what needs building first and the most is a replacement energy infrastructure. Forget about all of that black goo, just like T. Boone Pickens, let's go straight to the source of all energy on earth today, let's get it from the Sun. Someday, when we're smarter and less pressed for time, we'll make our own Sun.

Posted by scott at 01:37 PM