Global Budget Issues

The Wilson Quarterly is my favorite journal. Douglas Besharov and Douglas Call's article on our budget issues is a good example of the kind of brilliant writing often found in the WQ:

[M]any government pension and health care systems for the elderly worldwide are now little more than Ponzi schemes that are running short of new “investors.” Aggravating the budget situation is the rapid rise in health care costs caused by the development of new—and expensive—medical technologies, drugs, and treatment procedures. The math is simple: Projected tax revenues are not nearly sufficient to cover future obligations—with the imbalance growing over time as larger shares of the populations in these countries begin to receive benefits. The U.S. Social Security and Medicare trust funds are giant and growing IOUs from the federal government to future recipients. Last year, the government “owed” the trust funds about $4.3 trillion. (These IOUs are dutifully printed at the Bureau of the Public Debt in Parkersburg, West Virginia, and placed in a filing cabinet. Not exactly Al Gore’s lock box.)

To read the full article, click here.

The More Things Change, The More They Stay the Same

In 2010, the immigration debate seems to be reaching a fever pitch. It's important to note that the same racially-charged arguments against immigration have been made before. In short, the more things change, the more they stay the same. Guess the year Economist W. Jett Lauck made the following statement:

"our industrial system has become saturated with an alien unskilled labor force of low standards, which so far has been impossible to assimilate industrially, socially, or politically, and which has broken down American standards of work and compensation."

From Wilson Quarterly, Summer 2010, page 20; originally from "The Lesson from Lawrence," published in 1912. Mr. Lauck was apparently referring to Italians, Slovaks, Magyars, and Croatians. I wonder what Justices Scalia and Alito think about the Arizona anti-illegal-immigration law.

China and the U.S. Dollar

From the Wilson Quarterly (Summer 2009):

You want to know why China won't dump the dollar? It has almost no choice, unless a new worldwide currency is created. Robert Aliber, a University of Chicago professor, explains how America's rising debt has limited both China and America:

By 1980, [America's] net foreign assets (assets minus liabilities) were larger than those of all other creditor countries combined. But the next 20 years brought a reversal of unprecedented proportions. By 2000, America's net foreign liabilities had become larger than those of all other debtor countries combined, and its liabilities were still growing rapidly as foreign savings surged into Treasury bills and other dollar-denominated securities. The shift was amazing rapid. (pps. 56-57)

[Even so,] Beijing is not likely to let market forces determine the value of its currency. And if it were to begin buying many more yen or euros instead of dollars...politicians from Tokyo to Paris would go ballistic. They would accuse the Chinese of following a classic "beggar-thy-neighbor" policy, keeping the value of the yuan artificially low and thus increasing China's exports to their countries. So China's leaders will continue to buy dollars, even as they complain loudly that the United States' trade and fiscal deficits are too large. (pp. 58)

Meanwhile, from 1981 to the present, the Chinese population's savings rose from 20% of China's GDP to more than 50%. (See WQ, pp. 60) Basically, the Chinese started saving more money and had to put the money somewhere. Interest rates were fairly high from 1981 to 2000 in the United States, so America was a natural destination for deposits. How much are the Chinese saving? By some accounts, up to 2.5 trillion dollars per year.

What does it all mean? Probably three things: one, the United States must manufacture more products foreigners need, desire, and can afford; two, the United States may subsidize some types of manufacturing through tax credits to counteract China's currency protectionism; and three, at least for the foreseeable future, the American dollar will remain the world's "least worst" currency, but may still have to increase interest rates sometime this year to mollify investors.

Contrary to public belief, increasing interest rates isn't all bad. Higher interest rates encourage more Americans to save and minimize the risk of inflation; therefore, higher interest rates have positive benefits. I am very upset that my T. Rowe Price money market fund (PRRXX) is giving me near 0% interest; however, I am unsure whether to transfer the money into a Ginnie Mae fund. If the Federal Reserve raises interest rates, the value of the Ginnie Mae fund's shares should decline, so waiting until mid-2010 to invest may be a more prudent path. Absent some clear signal from the Federal Reserve regarding its future interest rate decisions, I bet many Americans will remain on the sidelines, upset but unwilling to make any major moves.

Update on April 30, 2011: on the other hand, consider this question from Caroline Baum, Bloomberg: "A dollar today buys only 45 cents worth of the goods and services it bought in the early 1980s, according to the Bureau of Labor Statistics. Can you explain why, in a time when prices are supposedly stable, the dollar has lost half its purchasing power?"

Libertarians and Responsibilities

From the WQ (Summer 2008, page 28):

When government takes over the responsibility from citizens, the citizens can't develop their own values anymore. So when you want people to develop their own values in how to cope with social interactions between people, you have to give them freedom.
-- Hans Monderman, Netherlands traffic engineer

This concept is so simple, even a European government worker can understand it. At least the Europeans offer benefits to all citizens, not just government workers, which creates less resistance to increased taxation. These generous benefits, however, create opposition to immigration, because more people entering a country sap the benefits from existing persons, assuming a stable and finite tax base. America, thus far, has been more open to immigrants, which is responsible for much of its success.

Housing's Real Issue: Bigger Ain't Always Better

The Wilson Quarterly (WQ, Summer 2008, Vol. 32, No. 3) published an article by Witold Rybczynski about affordable homes.

What's driving the high cost of houses today is not increased construction costs or higher profits...but the cost of serviced land.

The author refers to "serviced land" in two ways: one, the passing of costs from the government to developers for infrastructure; and two, NIMBY (Not In My BackYard).

Prior to Prop 13, the government would increase taxes on local communities for services that followed increased population growth, such as new roads, new parks, sewers, and general maintenance. Now, many local governments cannot increase property taxes to make up for the increased need for services, so they force developers to pay these costs if they want to build. The developers take the financial infrastructure hit up front and pass those costs onto the homebuyer at the end in the form of higher home prices.

NIMBY is easy to understand in this case. There is "widespread resistance to growth," so locals pass zoning laws and restrict building permits to prevent more houses from being built. These legally mandated slow growth policies lead to pent-up demand and not enough supply of houses, causing artificially inflated values. Anyone who's lived in Northern California and New York knows there isn't a problem with overpopulation and population density in California to justify California's slow growth policies--at least not yet. Rybczynski says,

According to the research of economists Edward Glaeser of Harvard and Joseph Gyourko of the Wharton School, since 1970 the difficulty of getting regulatory approval to build new homes is the chief cause of increases in new house prices. In other words, while demand for houses has been growing, the number of new houses that can actually be built has been shrinking.

One tactic cities use to stall new homes is zoning for large lots, like one acre. This forces larger houses and higher prices. In the past, many individual homes would be only 1/6 of an acre. Rybczynski states,

Smaller houses on smaller lots are the logical solution to the problem of affordability, yet density--and less affluent neighbors--are precisely what most communities fear most.

I would love to see a return to smaller houses. One advantage of not having a lot of space is people will consume less if they know there isn't so much space to hold their new purchases.

Follow-up from Mankiw's blog: Assar Lindbeck once called rent control "the best way to destroy a city, other than bombing." Rent control is another regulation that discourages new real estate development by providing an incentive for renters not to move. At the same time, it discourages new developers from investing in new buildings because the owners will be unable to charge higher market prices. I am conflicted about rent control, because there must be some cap on rent increases that will satisfy both renters and developers. Leaving renters to the pure whims of landlords doesn't seem ideal. Of course, in trying to establish an ideal cap on rent increases, we could end up with the problem of the cap actually inflating rents. For instance, if we enact a 5% annual cap, all landlords will probably raise the rent 5% a year when they might have kept the rent unchanged without the law.