New American Paradigm

Unemployment by Level of Education

Calculated Risk created a graph that breaks out unemployment rates by level of education.  While it's to be expected that more education attainment means greater pay and job security, what is immediately clear is that this recession is being felt by the poorest amongst us most. severely.  In fact you might say that the gap between the "Two Americas" John Edwards described, is getting wider.

As you can see, the increase is substantially greater for those without a high school diploma or equivalent than that of other education levels, particularly those with at least a bachelors degree. 

The Tea Party/Libertarian Connection

Nate Silver at FiveThirtyEight has done some interesting statistical analysis indicating that the April 15th tax day "Tea Parties" may have been more about (small "L") libertarian backlash than a broader Republican based movement.

Nate draws the connection between per capita contributions to libertarian Republican Presidential candidate Ron Paul and attendance at Tea Party events. Campaign contributions are a strong indicator of not only support, but of enthusiasm. 

To account for uneven attendance reporting, Nate measured per capita attendance by region dividing the US into 11 regions. 

The result seems fairly clear:

Obama's Fourth Way

The New Republic has an interesting take on Obama's governing philosophy.  It's been difficult for allies and enemies to categorize due in part to the fact that Obama is a different kind of Democrat.  Charges of Socialism may roll easily off the tongue for many conservatives, but it's not a label with any merit if you actually look at his proposals.  But he's also not a New Democrat in the Clinton mold either.  He retains the faith that so many Democrats lost in government having any positive influence. 

So what is he?

Obama has set out to synthesize the New Democratic faith in the utility of markets with the Old Democratic emphasis on reducing inequality. In Obama's state, government never supplants the market or stifles its inner workings--the old forms of statism that didn't wash economically, and certainly not politically. But government does aggressively prod markets--by planting incentives, by stirring new competition--to achieve the results he prefers. With health care, for instance, he would make it easier for employees to tote their insurance from job to job, eliminating the disincentive for insurers to invest in preventive care. Or take his bank plan, which helps banks dispose of their toxic assets, reducing uncertainty and making the banks more attractive to private investors--a far less drastic step than nationalization. Rather than force markets to conform to his wishes, he shapes their calculus so they conclude (on their own) that their interests coincide with his wishes.

End of Sprawl? Part II

Previously in part one of this series I talked a bit about how an obscure issue like land use had made it onto the President's radar.  After all, it's not like he doesn't have other things to worry about.  Yesterday President Obama said:

"I know a lot of you are worried about Iran's nuclear program and the implications it has on Middle East peace, but today I'd like to talk about the proposed strip mall in South Hill."

Ok he didn't really say that, but he has talked about the impact of urban sprawl and it's role in our current economic problems.  So today I'm going to describe the economics of sprawl and how it rears it's head in unexpected places.

First, to understand the problem you have to remember that first rule of real estate.  No, don't believe what Alec Baldwin told you, it's not Always Be Closing.

It's location, location, location.  Though local market conditions vary, as a general rule the closer to jobs and services one is, the more expensive the real estate.  Though things like views, crime, waterfront, quality schools and good antiquing can add value, you're going to save money by moving to rural areas.  That combined with absurdly cheap and convenient transportation in cars drives people further and further from town.

Geithner’s Requiem

Last month Treasury Secretary Timothy Geithner went to Capitol Hill in an attempt to calm the fears of Congress, investors, and banks. His mission… to give a broad outline of his plan so that an impatient audience would understand that a plan was forthcoming. Normally we would excuse a career finance geek who's used to operating behind the veil of secrecy of the Federal Reserve System for not being the most impressive of public speakers. Nor did anyone expect details of the plan given he had not yet begun to the skeleton crew left at the Treasury. But unfortunately his performance was so poor; his inability to answer questions so frustrating, and the plan so vague that it had the opposite effect. Not that I will ever have a chance to be Treasury Secretary, but I'm also confident that I'll ever be so bad at my job that I cause a small stock market crash.

A month later we are now starting to see details of the plan leak out and there are some things I and others find troubling. Here's the plan:

1. FDIC will set up partnerships with private investors to supply enough capital that it removes the risk from purchasing $2 Trillion or so in "toxic assets" that are weighing down banks. The theory here is that nobody will buy them because they can't figure out what they're worth. Once they are initially cleared this will then have the effect of restarting a market which is desperately needed to make this work. Even a dangerous investment has some terminal value, but it won't unless the investor is sure they can unload it later on.
2. Firms that invest in these assets will then be hired to manage them creating a secondary incentive to climb into the "bad asset" business.
3. Expansion of the TALF program which I'd call the "rest of us" part of the plan. Essentially it backs asset-backed securities (ABS) like student, auto, credit card and other consumer loans.

So what's the beef? Geithner was bashed mostly for his inability to explain how a fair market value would be determined that is fair to taxpayers but still is enough to have a positive effect on the banks. In addition, there was no indication how risk and profit would be distributed in this public/private partnership. Now we're seeing the reason he was reluctant to say, it appears the downside is all on the government side of the ledger and the upside to the investors.

To me and others the most troubling aspect of this plan is that it presumes that the assets are as Tim Duy puts it "there are no bad assets.  Only misunderstood assets." They seem to be convinced that the market is wrong and that these assets have some intrinsic value higher than where they are. There's a problem with that theory… it's wrong. Homes are only worth what people can afford, no more, and typically no less. The problem with the last decade or so is that creative dishonest lending practices inflated buying power by 40% in some cases. Take away the interest only, no money down, hybrid adjustable rate mortgages and that phony buying power disappears. It doesn't take an economist to figure out what happens when the buying power of potential homeowners is dramatically reduced.

So apparently our grand plan is to close our eyes and pretend that these assets are still worth more than they are, a nod to a philosophy Republicans have been falling all over themselves to end known as Mark to Market or Fair Value accounting. It used to be that if an asset appreciated or depreciated, the bank simply held it at the same value until the gain or loss was realized… reality be damned. You'd think that they would value honesty and integrity in financial reporting. By the way, I would not suggest trying this strategy at home. It could have disastrous consequences.

Husband: "Honey how much is in the bank account?"

Wife: "Let's say… A MILLION!"

Husband: "Ok I'm buying a boat."

Needless to say this story ends in a messy divorce. The problem being that when the government tries the same thing there is no court we can run to try to dump our spouse and boat on. I suppose if there are no more losses to book on these assets it won't be a problem and we'll in fact see a gain. But if there were no more losses, why would we need the government inducing investment?

End of Sprawl? Part I

Since it's not the sexiest of issues, land use is never covered by the media like taxation, global warming, or the financial meltdown. Perhaps it should given inextricable link to all of those issues and quite possibly their leading cause. In fact land use policy has a great effect on our lives than virtually any other government policy. Why is it important? Urban sprawl.

When President Obama said last month that "The days where we're just building sprawl forever, those days are over," most people shrugged their shoulders and went back to soaking their 401k statement with tears. In fact this was a profound statement of not only the direction his policies would head, but an acknowledgement of where we are as a country. Obama understands intuitively what builders and homeowners across the country are finding out the hard way, those development patterns are unsustainable and probably a thing of the past.

Urban sprawl can be defined as ""dispersed development outside of compact urban and village centers along highways and in rural countryside." You know it when see it. It's soulless strip malls and large lot/large home development outside of cities. Its cause is simple… lax land use policy that allows urban development on cheap land in rural areas. Unlike normal urban development patterns, urban sprawl is dominated by the car with everything from large parking lots to wide multi-lane roads being designed to accommodate while pedestrian mobility is limited and often conflicts with the design of the development.

Although it occurs in Canada and Europe to a degree, the US fell head over heels for sprawl years ago and the affair only grew more passionate with time. Since most of the country developed after the advent of the car, development geared to this absurdly cheap form of transportation was the norm. In Europe, which mostly built up prior to the automobile, cities are densely packed since foot travel was the most common form of getting around. Everyone had to live within walking distance of everything they needed, their job, the market, a doctor, etc. As a result, travel by car wasn't necessary within town making it more expensive than trains for inter-city travel.

It's a strange phenomenon in that the demand is created by people wanting to get their piece of paradise, killing it in the process. Rather than sharing communal greens in urban parks and, people crave their own private park in a large yard. The result is the destruction of rural areas across the country. Wanting a big home but unable to afford it people turn to large homes built in cheap rural areas commuting further and further to work clogging roads along the way. The population of these areas then demands services but don't have the population in their neighborhood to support them so strip malls are built and designed to accommodate vast amounts of cars.

One of the phenomena contributing to this problem is the "Not in My Back Yard" mentally, otherwise known as NIMBY. As noted before local government tends to fly under the radar despite its impact on our lives. Chances are your local Mayor has made a much greater impact on your life than the President or Congress yet most people can't even name someone from their City or County Council. For the last 12 years I've been one such faceless City Councilmember so I understand all too well how to introduce myself to people; approve a new development or change in zone standards near their home. Suddenly people that haven't paid the least bit of attention to months and months public process, meetings, design charrettes, and outreach are in your face telling you what an idiot you are for destroying the "character" of the community. Oddly, they may live in old small lot homes in a historic part of town and demand large lot homes to "preserve" character. In isolation, this isn't all that big of a deal. But repeated millions of times across the country and the path of least resistance for locally elected officials becomes land use controls that resemble sprawl more than good planning. In incorporated areas outside of cities the problem is reversed, in this case properties are larger and owners typically want to preserve the development potential as it makes their property worth more. Combined with the moneyed interests of developers, rural areas tend to support lax controls and therefore encourage development inappropriate for the area.

Over the next few weeks we'll take a look at sprawl's connection to the subprime meltdown, its effect on tax policy and local government resources, how it impacts climate change, and generally decreases our quality of life. Obama may think that its day has come and gone, but without smart policy that may not be the case. Ultimately it will take a different way of looking at how we live our lives. If we continue to look at a big house/big yard in the suburbs as the way to the good life, we'll actually further erode our quality of life.

Debt and Foreign Policy

Last week the big news in Sino-US relations was the harassment of a US spy ship near a Chinese nuclear submarine base by the Chinese Navy. I use the term harassment a bit tongue in cheek since it consisted of mooning the American sailors rather than the sort of menacing behavior we might normally expect.

Anyway it should sound familiar to those of us at least old enough to remember when Nirvana was still recording because China through a similar hissy-fit over a US spy plane in the first few months of the Bush administration. That incident turn more serious since our people were essentially held hostage for a week and a half, but ultimately cooler heads prevailed and we went back to patriotically buying shoes made by Chinese slaves. I should point out that in both cases our spying was on the up and up since they were in international airspace or waters, however imagine how nervous we would be with Russian ships cruising around 30 miles off the Pacific coast.

That said, the incident drowned out coverage of a much more disturbing and potentially dangerous bit of diplomatic saber rattling coming out of Beijing. Premier Wen Jiabao demanded that the US "guarantee the safety" of China's $1 Trillion in US debt.

"We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets… To be honest, I am definitely a little worried."

Make no mistake; this is a direct shot across the bow. Combined with the spy ship incident it's clear they are testing President Obama's resolve and demonstrating their position of strength. With Secretary of State Clinton just back from her Friendship "Please please please keep buying our debt and we'll stop talking about human rights" tour, the intent couldn't be more clear.

So how did they end up with so much of our debt in the first place? It's actually a strategy China has employed to keep their currency deflated compared to the US. Since we have a trade deficit with China they end up with extra US dollars. Most countries would use this to build up their economies, make new investments, and raise the standard of living for their people. However, that would mean their currency would rise relative to the US making Chinese manufacturers less cheap. And let's face it, cheap is the only attractive thing about dealing with the Chinese government. Not being concerned in the least for the average Chinese worker gives their government an opportunity to pursue a strategy most other nations would never think of employing. So to keep their currency from rising they buy US Treasuries by the boatload. This keeps their currency rising and falling with our own. It also helps out the US because an eager buyer for our debt means interest rates remain low and cheap debt helped fuel our consumer driven economy.

However, this also gives China enormous leverage over the US. How? China can wreck what's left of our economy by selling off all their Treasuries at once, sending the dollar into a freefall. There's actually precedent for this sort of behavior. During the Suez Canal Crisis in the 50's the US was demanding that the United Kingdom cease hostilities (isn't it cute that we used to try to keep the Brits from going to war?) Upon their refusal President Eisenhower announced that he would sell US reserves of the Pound as well as their debt. The threat had immediate effect and the crisis ended. How could we respond to some action by China if they threatened to sell off our debt crashing our economy? Is Taiwan's independence more or less important to us than another Great Depression?

In this regard our political leadership, Democrat and Republican, undermines US foreign policy and security by refusing to bring spending and taxation into balance. They do so at the behest of unrealistic voters who alternately want cut taxes from Republicans and increased spending from Democrats. Perhaps our current situation is a good time to reevaluate those conflicting demands.