Individuals are doing it, banks are doing it — faced with the horrific news and pictures from Japan, everybody wants to do something, and the obvious thing to do is to donate money to some relief fund or other.
We went through this after the Haiti earthquake, and all of the arguments which applied there apply to Japan as well. Earmarking funds is a really good way of hobbling relief organizations and ensuring that they have to leave large piles of money unspent in one place while facing urgent needs in other places. And as Matthew Bishop and Michael Green said last year, we are all better at responding to human suffering caused by dramatic, telegenic emergencies than to the much greater loss of life from ongoing hunger, disease and conflict. That often results in a mess of uncoordinated NGOs parachuting in to emergency areas with lots of good intentions, where a strategic official sector response would be much more effective. Meanwhile, the smaller and less visible emergencies where NGOs can do the most good are left unfunded.
In the specific case of Japan, there’s all the more reason not to donate money. Japan is a wealthy country which is responding to the disaster, among other things, by printing hundreds of billions of dollars’ worth of new money. Money is not the bottleneck here: if money is needed, Japan can raise it. On top of that, it’s still extremely unclear how or where organizations like globalgiving intend on spending the money that they’re currently raising for Japan — so far we’re just told that the money “will help survivors and victims get necessary services,” which is basically code for “we have no idea what we’re going to do with the money, but we’ll probably think of something.”
For reasons which you can find outlined in my Discover Your Inner Economist, I am generally in sympathy with arguments like Felix’s, but not in this case. I see a three special factors operating here:
1. The chance that your aid will be usefully deployed, and not lost to corruption, is much higher than average.
2. I believe this crisis will bring fundamental regime change to Japan (currently an underreported issue), rather than just altering the outcome of the next election. America needs to signal its partnership with one of its most important allies. You can help us do that.
3. Maybe you should give to a poorer country instead, but you probably won’t. Odds are this will be an extra donation at the relevant margin. Sorry to say, this disaster has no “close substitute.”
It may be out of date, but the starting point for any study of Japan is still Karel von Wolferen’s The Enigma of Japanese Power. Definitely recommended.
The fact that Charlie Sheen has decided donate a portion of the money from his live stage shows to help people affected by earthquake in Japan should be all you need to know that donating money to Japan is a bad idea.
Earthquakes, hurricanes, floods, tsunamis, volcanoes and even chemical or nuclear disasters can provoke a strong urge on the part of people to want to provide disaster relief in the form of charitable donations directed at those afflicted by the most recent disaster. This is almost always a mistake.
Almost all international disaster relief is ineffective. Part of the reason for this is that relief groups rarely know who is suffering most, or how aid can be most effectively directed.
Concern and generosity are entirely human—and entirely admirable!—responses to the disaster and tragedy in Japan. But if you really want to be helpful, as Felix Salmon and others have noted, there might be better ways to donate your money than just sending it to Japan. There are two basic rules for being useful: First, give to organizations with long track records of helping overseas. Second, leave it up to the experts to decide how to distribute the aid.
The first suggestion is simple: Avoid getting scammed by choosing an internationally known and vetted group. Big, long-standing organizations like Doctors without Borders and the International Committee of the Red Cross are good choices. If choosing a smaller or local group, try checking with aid groups, Guidestar, or the Better Business Bureau before submitting funds.
The second suggestion is more important. Right now, thousands of well-intentioned donors are sending money to Japan to help it rebuild. But some portion of the donated funds will be earmarked, restricted to a certain project or goal, and therefore might not do the Japanese much good in the end. Moreover, given Japan’s extraordinary wealth and development, there is a good chance that aid organizations will end up with leftover funds they will have no choice but to spend in country—though the citizens of other nations wracked by other disasters, natural or man-made, might need it more. Aid organizations can do more good when they decide how best to use the money they receive.
Felix Salmon wrote a column for Reuters warning people “don’t donate money to Japan.” His argument is that donations earmarked for a particular disaster often “leave large piles of money unspent in one place while facing urgent needs in other places.”
Commenters pointed out that many relief organizations accept donations with a disclaimer that surplus funds may be applied elsewhere. And other relief organizations don’t allow for earmarking of donations at all, but that doesn’t mean they can’t use a burst of cash during an extraordinary crisis.
Salmon also wrote, “we are all better at responding to human suffering caused by dramatic, telegenic emergencies than to the much greater loss of life from ongoing hunger, disease and conflict. That often results in a mess of uncoordinated NGOs parachuting in to emergency areas with lots of good intentions, where a strategic official sector response would be much more effective.”
That last probably is true. I also have no doubt that various evangelical groups already are planning their crusades to Japan to rescue the simple indigenous people for Christ in their time of need. (Update:Yep.)
So if you do want to donate money, I suggest giving to the excellent Tzu Chi, a Buddhist relief organization headquartered in Taiwan. Relief efforts in Japan are being coordinated through long-established Tzu Chi offices and volunteer groups in Japan, not by random do-gooders parachuting in from elsewhere. Tzu Chi does a lot of good work around the globe, so your money will be put to good use somewhere.
An illegal alien who brings his or her child into the country illegally undoubtedly assumes that that child will attend American schools at taxpayer expense. The parent may also hope that the child will graduate from high school and go on to college. The DREAM Act, newly reintroduced by Sen. Harry Reid to the lame-duck session, puts the official imprimatur on those unofficial intentions, declaring that the U.S. expects and even welcomes such behavior.
Under the DREAM Act, any illegal alien under the age of 35 who entered the country before the age of 16 can apply for legal status if he obtains a GED or graduates from high school and begins post-secondary education. Gang members and those with DUI convictions are not barred from DREAM Act eligibility. The act signals to prospective illegal aliens the world over that if they can just get their child across the border illegally, they have put him on the path towards U.S. citizenship — and, as significant, the child will then be able to apply for legal status for his parents and siblings. And every such student will be granted in-state tuition rates by federal fiat, even if the state in which he resides bans in-state tuition for illegal immigrants.
DREAM Act beneficiaries are certainly the most sympathetic category of amnesty candidates, and opponents of the act have been accused of hard-heartedness. Yet the act indisputably encourages and incentivizes more illegal behavior. It continues to send the message that the U.S. is not serious about its immigration laws, but will always eventually confer the same benefits on people who break the law entering the country as on those immigrants who respected American law. The huge administrative costs of the act — it is conservatively expected to qualify 2.1 million illegal aliens for amnesty — will be borne by U.S. taxpayers and by legal aliens, whose fees fund the citizenship service
I think it’s useful in this debate to be as clear we can be. We’re mostly talking about Mexicans, so let’s just talk about Mexicans. Lots and lots and lots of Mexicans come across the border to the United States not because they’re a nation of heedless antinomians, but because this is (was?) where the work is. Many come because much of their their family resides here, legally or ilegally. It’s worth noting that the southwestern portion of the United States just was Mexico, once upon a time. There is an undeniable economic and cultural continuity between Mexico and the United States. The border distorts and disrupts it, but it cannot and will never put an end to it. The pattern of traffic between these two countries is not something to choke off, but something sensibly to regulate and rationalise.
“But we do regulate it sensibly!” you may insist. Well, suppose you’re a hardworking and ambitious Mexican with no family legally in the States and not much education, but you’ve got friends there, 50 miles away, and they tell you they’re getting steady, relatively well-paying work. One of the things that’s so attractive to you about America is it’s sound institutions, including its sturdy rule of law. You would very much like to migrate to the United States legally. So what are your options? Zip. Zilch. Zero. You have no options! There is no way to “get in line” and “wait your turn” because there is no line for you to stand in that leads to the legal right to live and work in the United States. So you pack up one day, take a hair-raising hike through the desert with your young daughter, meet up with your friends in Tucson, and get to work on the American dream. What were you supposed to do? Consign yourself and your daughter to a life on the edge of poverty out of respect for the American rule of law? Please.
The DREAM Act sends the message that although American immigration law in effect tries to make water run uphill, we are not monsters. It says that we will not hobble the prospects of young people raised and schooled in America just because we were so perverse to demand that their parents wait in a line before a door that never opens. It signals that we were once a nation of immigrants, and even if we have become too fearful and small to properly honour that noble legacy, America in some small way remains a land of opportunity.
Yes, the DREAM Act also incentivises illegal activity. But if the activity is not one that ought to be illegal, perhaps we should consider changing the law? Something to consider, anyway. In the meantime, this small reform will make America a somewhat more decent place.
Well that seems compassionate! And it’s only a small group of people we’re talking about, right? Just 60,000 a year.
Wrong. Hugely wrong.
Let me give some alternative scenarios, all of which would become possible if the DREAM Act were enacted.
Possibility No. 1: You are an illegal alien who entered the country at age 21, too old to qualify for DREAM. You’ve been apprehended and are threatened with deportation. What to do? Simple — using falsified papers, you file an application under DREAM anyway. Filing an application immediately halts deportation proceedings.
Wait a minute, you wonder: won’t using false papers get me in trouble? Not a bit. Just the opposite. Even if the fraud is detected and your application is refused, you simply revert to your previous status. In the process, however, you have gained a new legal advantage: DREAM forbids the Department of Homeland Security from using any information in a DREAM application in deportation proceedings. So now you argue that the deportation proceedings are fatally tainted because you have yourself provided DHS with information that they could now use against you.
The ploy might fail. Still: what a great no-risk option!
Possibility No. 2:. You’re a 40-year-old illegal alien who entered the country as an adult. You have a third-grade education. You are barely literate even in Spanish. Your back is bothering you; you are not sure how long you can continue working. Quite frankly, no country on earth would regard you as a desirable immigrant. Don’t despair. DREAM can offer you too an amnesty and gain you access to a lifetime of taxpayer-funded disability payments.
You have kids don’t you? If they apply successfully under DREAM, they can sponsor you. While some talk about DREAM applicants as “skilled” immigrants, in fact the law’s requirements are so lenient that your kids would have to mess up very seriously to forfeit the law’s benefits. All they need to do is enroll in some institution of higher learning or the military and survive there for two years. Graduation is not required.
Does that sound expensive? Don’t worry: your kids will receive in-state tuition rates and will be eligible for federal student aid.
They’re too young for university? Don’t worry: They can file the papers at age 12. As soon as they give notice of their future intent to attend to college or join the military, they immediately receive safe haven.
They don’t find military life attractive? If they can show “significant hardship,” they can quit before their two years have been fulfilled. Honorable discharge is NOT a requirement under the DREAM law.
They have had a little trouble with the law? Maybe a history of moving violations that put people’s lives at risk? So long as they have not been convicted of a serious crime, they’re okay.
DREAM is an amnesty not only for the people described by The Economist blogger, but also for all their parents and siblings.
Possibility No. 3. I’m still living in Guatemala, but I’d dearly like to come to the United States. Can DREAM help me?
Si se puede.
DREAM sends a message to every teenager on planet Earth: Come to America. If you enter the United States before age 16, and if you can remain here for five years (or can buy papers that purport to show you have lived here for five years), you’re as good as a citizen already. No deportation proceedings. No risk that your application will be used against you. Lenient and subsidized requirements for permanent residency. What’s not to love?
First, it’s not quite right to think of DREAM, a narrowly tailored provision that offers a relatively small group of young people a path to citizenship only if they are able to clear a number or hurdles, as an “amnesty”. Second, the process by which our notional 40-year-old undocumented immigrant can become a citizen is precisely the same as the process by which Mr Frum’s Canadian father could become a citizen through Mr Frum’s sponsorship. It’s not amnesty, and Mr Frum is simply goading the nativist rabble by choosing to misuse language in this way. Moreover, Mr Frum effectively misrepresents his scenario by conveniently omitting the dispiritng timeline. Let’s fix that.So, you’re Mr Frum’s 40-year-old undocumented immigrant. DREAM, which requires you to be between 12 and 35 at the time of application, does nothing for you, even if you did come into the country as a child. But you have a daughter who does qualifies. Woohoo! You’re in like Flynn, right? Well, no. Probably not.
Suppose DREAM becomes law in 2011. Your kid applies right away and earns status as a “conditional legal resident” (or “CLR”). Now, can you your kid sponsor you for legal permanent residency? No, she cannot. Only citizens can sponsor their parents. Suppose your kid goes to college and stays out of trouble. The earliest she can apply to become an “LPR” or “legal permanent resident” (ie, get a green card) is 5 1/2 years after approval for conditional permament residency. That’s some time in 2016 at the earliest. Now, a green card-holder can apply for citizenship after five years. Under DREAM, as I understand it, once a CLR is approved for a green card, the time spent as a CLR counts toward citizenship. So someone approved for a green card under the auspices of DREAM ought to be able to apply for citizenship right away. Let’s assume miracles from the bureaucracy and say all these applications are processed and approved at the speed of light. So, thanks to DREAM, your daughter will be a citizen no sooner than 2016, at which point she can finally sponsor you (as long as she’s over the age of 21). But don’t get excited yet! You entered the country illegally, and were working illegally before applying for a green card, and that means you aren’t eligible for a green card. ( See question 10 here.) So, sorry, DREAM can’t help you.
Suppose you entered the United States legally on a visa and then left your minor daughter here once your visa expired, or something like that. In that case, she could sponsor you for permanent residency after qualifying for citizenship through DREAM. In this case, you could be an American as soon as 2021, assuming magical bureaucratic efficiency. Of course, among those young people able to work their way to citizenship through DREAM, how many will have parents who qualify for sponsorship? Not many.
Mr Frum ends by spreading a falsehood. He writes:
And best of all: DREAM stands as an ongoing invitation, forever and ever. DREAM’s benefits extend not only to people who happen NOW to be illegally present inside the United States. DREAM’s benefits will be extended to all those who may enter illegally in future.
This is flat-out wrong. Unfortunately, DREAM is a niggardly, one-time affair. According to the text of the bill, DREAM applies only if “the alien has been physically present in the United States for a continuous period of not less than 5 years immediately preceding the date of enactment of this Act…” That is to say, DREAM wouldn’t apply to kids who came to America three years ago, much less to any kids who comes in the future. Mr Frum is sowing confusion when he says that
DREAM sends a message to every teenager on planet Earth: Come to America. If you enter the United States before age 16, and if you can remain here for five years (or can buy papers that purport to show you have lived here for five years), you’re as good as a citizen already.
Were Mr Frum to read the bill, he would see that he has made a serious error. DREAM is a stopgap measure of exceedingly limited scope which would slightly mitigate the injustices wrought by America’s reality-defying immigration and citizenship law. I look forward to his correction.
I’ll answer Will Wilkinson’s specific points, but I first have to say this: Wilkinson’s mode of arguing exemplifies why the immigration debate doesn’t ever seem to go anywhere.
Advocates of more and more immigration habitually use a 4-stage method best identified by Antony Jay and Jonathan Lynn in the Yes Minister series. The stages go as follows:
1) Nothing is going to happen.
2) Something may be about to happen, but we should do nothing about it.
3) Maybe we should do something about it, but there’s nothing we *can* do.
4) Maybe there was something we could have done, but it’s too late now.
Immigration proponents are so convinced that more immigration is good in itself that they do not always worry as much as they should about the way in which they achieve their aims. They sell huge society-changing transformations as small incremental steps.
When the sales pitch proves wrong or hugely exaggerated, they seem untroubled. Wilkinson’s own blitheness perfectly exemplifies the pattern. Running through his first post is a persistent undertone that the very idea of immigration laws is a big mistake. “Yes, the DREAM Act also incentivises illegal activity. But if the activity is not one that ought to be illegal, perhaps we should consider changing the law?”
Then when I point out the various ways in which this incentive operates, he squawks that the law in fact is “narrowly tailored” and applies only to “a relatively small group.”
Is it too Freudian to suspect that the lurid accusation of deceit repeatedly lodged by Will Wilkinson reveal an awareness of the credibility problems on his side of the argument?
The Democrats are trying to tinker with the DREAM Act to make it more palatable. Most notably, they’ve lowered the top age for eligibility from 35 to 30, but that misses the point. As I note in my piece on the homepage, what’s important is the age when they arrived, not how old they are now — someone who’s lived here continuously since they were 12 months old is simply not in the same boat as someone who arrived a month before their 16th birthday and is now 21, but DREAM treats them the same.
And I didn’t even address the cost issue, about which my colleague Steven Camarota writes today. He estimates that the bill’s college-attendance requirements will cost U.S. taxpayers $6.2 billion in subsidies for educating the illegal aliens who are expected to enroll to get a green card. And the roughly 1 million additional illegal-alien students at state universities and community colleges will reduce the educational opportunities that would otherwise have been available to Americans.
There is a big reason why the DREAM Act was a campaign promise for Reid, the same reason the White House recently hosted high-level meetings with members of the Hispanic caucus regarding the bill and has expressed so much interest in passing it: The act would be an amnesty for millions of illegal aliens inside the United States. This is something the White House and Reid have been desperately seeking through a comprehensive immigration bill, but has yet to gain traction in Congress.
Amnesty has never been a good way to solve the illegal immigration problem—whether through the DREAM Act or a mass legalization. As we learned in the 1986 amnesty, doing so simply encourages more individuals to break the law and enter the United States illegally. Among several other concerns, the DREAM Act rewards those who violated immigration laws by granting them in-state tuition while state laws deny legal aliens on student visas tuition benefits. The act’s lax standards would make it tough to police for fraudulent applicants, while the government would be prohibited using information submitted to deport anyone who files a DREAM Act application and does not qualify.
If Reid moves forward, the DREAM Act debate will almost certainly be filled with nice anecdotes about college education, military service, and additional tax revenues. Don’t be misled. Despite these seemingly humanitarian aims, the White House and Reid know what the DREAM Act debate it really about—finding a way to avoid the law and legalize illegal immigrants inside the United States. Packing amnesty in pretty paper doesn’t mean it isn’t still an amnesty. Congress and the White House need to focus instead on reforms to the immigration system that will enforce the law, maintain security, and promote the economy. Such a system requires robust enforcement of immigration laws inside the U.S., a secure border, reforms in the visa system, and cooperation with Mexico and other appropriate countries on law enforcement/public safety issues as well as free market initiatives.
The Dream Act, legislation designed to give children of undocumented workers who came to the United States under the age 16 a path to citizenship in exchange for a promise to attend college or join the military, will be debated in Congress today.
Because the Dream Act does not expire, or impose any numerical cap, the scope of the bill’s amnesty program could be enormous. And by rewarding illegality, the legislation will incentivize even more of it — and send the message that future illegal immigrants will be rewarded with amnesty as well.
Meanwhile, one of the bill’s sponsors, Sen. Dick Durbin, D-Ill., pointed out that punishing the children of illegal immigrants who have grown up as Americans is itself un-American.
These brave young men and women, who have all this energy and all this dedication, have no country. They have no legal status in this country. They didn’t have any voice in that decision about whether to come here. They were the kids brought in the back of a car or the back of a truck into the United States. But they grew up here believing America was home.
Gary Locke, President Barack Obama’s commerce secretary, agrees with Durbin, telling reporters:
The American taxpayer has invested in them, and unless we pass the Dream Act, we will keep throwing away this hard-earned investment. Also, a quarter of startup companies that eventually went public in the past 15 years were started by immigrants, he said, meaning some of these students could “develop the next Google or Intel.
The conservative Heritage Foundation, on the other hand, sees little to like about the proposed legislation:
Among several other concerns, the Dream Act rewards those who violated immigration laws by granting them in-state tuition while state laws deny legal aliens on student visas tuition benefits. The act’s lax standards would make it tough to police for fraudulent applicants, while the government would be prohibited using information submitted to deport anyone who files a Dream Act application and does not qualify.
States that have had a large influx of immigrants tended to produce more, hire more and pay workers more than states that have few new foreign-born workers, the study shows. For every one percent increase in employment from immigration, the study finds, a state will see a .4 to .5 percent increase in income per worker.
In conducting the study, Giovanni Peri, an associate professor at University of California, Davis, compared output per worker and employment in states that have had large immigrant inflows with data from states that have few immigrant inflows. Peri found no evidence that immigrants “crowd-out” employment for American citizens.
Peri concludes that immigration boosted states’ output, income and employment because the economies “[absorbed] immigrants by expanding job opportunities rather than by displacing workers born in the United States.” Further, the results of the study support the theory that U.S.-born workers and immigrants tend to take different occupations, says Peri.
Never mind the stimulus vs austerity debate: here’s something that both sides should be able to get behind. It’s a simple legislative fix which increases tax revenues without raising taxes; which increases the demand for housing; which increases the economy’s productive capacity; and which boosts wages for American workers. It’s about as Pareto-optimal as legislation gets. So let’s open the borders, and encourage much more immigration into the US!
The SF Fed’s Giovanni Peri has the latest research on the subject:
Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.
The effects of immigration on US wages are large, positive, and significant:
Over the long run, a net inflow of immigrants equal to 1% of employment increases income per worker by 0.6% to 0.9%. This implies that total immigration to the United States from 1990 to 2007 was associated with a 6.6% to 9.9% increase in real income per worker. That equals an increase of about $5,100 in the yearly income of the average U.S. worker in constant 2005 dollars. Such a gain equals 20% to 25% of the total real increase in average yearly income per worker registered in the United States between 1990 and 2007.
It’ll be interesting to see how much debate this paper receives. Anti-immigration forces are more likely to ignore it than attack it, I think, if they don’t like what it says. And George Borjas seems to have stopped blogging over a year ago, which is a shame, because he would be the perfect foil for Peri.
What’s really striking about this is that the very mechanism that provides the productivity boost — the fact that immigrants don’t speak English well and therefore push native workers out of manual labor and into higher-paying jobs — is precisely the thing that most provokes the immigrant skeptics. They all want immigrants to assimilate faster and speak English better, but if they did then they’d just start competing for the higher paying jobs that natives now monopolize.
The usual caveats apply here. This is only one study. (Well, two actually, but still.) And in order to generate useful results the authors have to control for a whole menagerie of variables that can muck things up. There’s always a chance that some important variable got missed or that another one got controlled for incorrectly. So don’t take this as the last word. It does, however, join a growing literature that suggests immigration has no negative effect on wages and might actually have a positive effect. Interesting stuff.
Think of some classic “bad” jobs that we find a lot of immigrants doing—basically the tidying-up industries. Now imagine that tomorrow 75% of the maids, the janitors, the dishwashers, the gardeners, the people who make the beds at hotels, etc. are all teleported to Mexico. This is a class of low-income people that’s vanished, so it’s possible that their teleportation will make certain statistical sets look better. But what’s going to be the impact on the living standards of those of us Left Behind in the United States of America?
Well there are really only two things that can happen here. One is that to an extent things can just be allowed to be dirtier and the other is that to an extent people can spend less time doing things that aren’t cleaning and more time cleaning. Down the first pathway, overall living standards decline because of the increase in the overall level of filth. Down the second pathway, overall living standards decline because of the decrease in the production of other goods and services. It’s true that amidst this overall decline in living standards some specific individuals would probably benefit (the remaining 25% of cleaners, for example) which is why there’s room for empirical research like the SF Fed paper linked above, but it’s easy to see that on the whole immigration boosts living standards even before you consider the positive impact on the immigrants.
At issue is the fact that here in the developed world we’re not peasant farmers fighting to support ourselves on a fixed quantity of viable agricultural land. When new workers come onto the scene and do jobs, they create more surplus. To get the kind of zero-sum effect that people think occurs when you get rid of immigrants, what you would actually need to do is send retirees to the Death Panels and turn them into Soylent Green. But of course even there we note that the interests of elderly people matter, morally speaking, and it would be grossly wrong to simply write them off in the interests of efficiency.
Calculated Risk tells us the key to fixing the housing market:
The key to the housing market is to absorb the excess inventory. That means more households and fewer new housing units. Luckily housing starts are very low right now, but unfortunately there is very little job growth (and therefore little new household formation).
But job growth is not the only way to get new household formation, as I’ve argued again and again, we have immigration at our disposal. Of course, there are the usual complaints about jobs. But the weakness of this argument can be seen in a new paper Felix Salmon directs us to:
Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.
It is well understood that the removing capital tariffs and protectionism would increase overall efficiency and incomes. Since immigration restrictions are labor market protectionism we shouldn’t be surprised to see that is has similar positive effects.
Unfortunately, journalists and pundits don’t seem to oppose labor protectionism nearly as much as they oppose capital protectionism. We would see an outcry among op-eds and pundits if we were seeing a worldwide rise in capital protectionism, because they recognize that beggar-thy-neighbor policies make everyone worse off. But no similar reaction has come from the rise in global labor protectionism
[…] Something that certainly shouldn’t be controversial is the fairly obvious point that if we allowed more immigrants to come to the United States this would bolster home price values in a clearer and more sustainable way than any kind of crazy patchwork of tax breaks. Right now we have more houses than households, if we had more immigrants we’d have more households. We’d work off the excess inventory more quickly, and be closer to the day when home construction returns as a viable economic sector.
Adam Ozimek offers up some quantitative research on the scale of the effect citing research from Albert Saiz (PDF) indicating that “[i]mmigration inﬂows equal to 1% of a city’s population were associated with increases in average or median housing rents and prices of about 1%.”
One way to especially take advantage of this effect and politically frame it as housing stabilization policy would be to create a special new class of visa specifically for people who purchase homes in the United States.
Well, I wouldn’t describe myself as belonging to the “anti-immigration forces.” But I will say that the study’s findings are hardly surprising. We’ve known for a pretty long time that immigration tends to increase wage dispersion by raising effective incomes at the top and depressing them at the bottom. And Peri’s findings regarding the impact on average income doesn’t tell us much about the distribution of gains. Felix excerpts the following from Peri:
Over the long run, a net inflow of immigrants equal to 1% of employment increases income per worker by 0.6% to 0.9%. This implies that total immigration to the United States from 1990 to 2007 was associated with a 6.6% to 9.9% increase in real income per worker. That equals an increase of about $5,100 in the yearly income of the average U.S. worker in constant 2005 dollars. Such a gain equals 20% to 25% of the total real increase in average yearly income per worker registered in the United States between 1990 and 2007. [Emphasis added.]
But how does immigration impact the median worker rather than the average worker? And how does it impact wages of workers at, for example, the 10th percentile?
In 2006, Peri co-authored a paper with Gianmarco I.P. Ottaviano of the Universita’ di Bologna that added an important wrinkle [PDF]:
Using our general equilibrium approach we estimate that physical capital adjsust promptly and fully to immigration (already within one year) and that immigrants are imperfect substitutes for US-born workers within the same education and experience group (because they choose different occupations and have different skills). These two facts, overlooked by the previous literature, imply a positive and significant effect ofimmigration on the average wage of U.S.- born workers, already in the short run. They also imply a small negative effect of immigration on wages of uneducated US born workers and a positive wage effect on all other US-born workers. Hence only a very small fraction of the increase in College/High School Dropout wage gap during the 1990-2004 period can be attributed to immigration.
A central question is how we weight the impact of immigration on “uneducated” US born workers. I tend to think the U.S. can accommodate a relatively large immigrant influx — I’d like to see an influx only slightly smaller than what we have now when we combine authorized and unauthorized immigrants, but with authorized and skilled immigrants much closer to 100 percent of the total than is presently the case. But that’s because I’m less concerned about wage dispersion than my left-of-center counterparts.
I wonder if my interlocutors would accept that we should only pay attention to the average effect of, say, changes to tax policy and ignore the impact on the median household. I doubt it.
Today’s earlier post has naturally aroused suspicions that I am simply a knee-jerk stimulus opponent. This is not true. I tepidly supported the notion of stimulus, though I also thought that the stimulus we did was not well executed, because Democrats wanted to use it to execute their policy priorities, rather than to provide maximal stimulus. I said at the time that “shovel-ready” infrastructure projects really weren’t; that’s not how the government procurement process works, and the federal government tends to slow things down, not speed them up. As it was under George Bush, politicians seemed more interested in using stimulus as an excuse for stuff they already wanted to do, than in actually figuring out what was most stimulative. (My candidates: payroll tax cut, more lavish unemployment benefits).
And what do I think now? Well, protestations aside, the stimulus we ended up doing was huge. Maybe it wasn’t as huge as some would have liked, but $800 billion dollars is almost 6% of GDP. (2% if you spread it over 3 years, as the stimulus was). All told, running a deficit of 10+% of GDP ought to have some pretty powerful stimulative effect.
So far, I’ve been underwhelmed. Maybe we were going to end up so far in a ditch that we wouldn’t even be able to see sky when we looked up, only mud. On the other hand, maybe simply not repeating the massive, massive monetary mistakes of the 1930s was enough to keep us out of the Great Depression, and the stimulus merely tinkered around the edges. I find the latter at least as plausible as the former.
When you combine middling and hard-to-prove results with the fact that the stimulus we got was so obviously wrapped up in the political agenda of the Democratic Party, I think that the case for stimulus has gotten weaker. Stimulus is always going to get wrapped up in the agenda of whatever party is in power–it will concentrate too much on long-term strategic attempts to change the aggregate level of government expenditure; it will be deployed inefficiently; it will be stretched out to maximize electoral rather than economic effectiveness.
I’d much rather see people talking about how best to ease the economic transition. One way to think of recessions is that they always represent the transition point between two states of the economy: high inflation to low inflation, overleveraged to under, or what have you. Those transitions involve a great deal of human suffering, and contra the “work the rot out” school of economic policy, I do not think that this suffering is necessary.
But the bigger problem is that the argument about the stimulus is basically unwinnable, for now. That’s because, when you look past the gotcha quotes, much of the Obama administration’s justification for the Recovery Act relies on a difficult-to-prove counterfactual — that it created or saved jobs.
So, unemployment could even be going up, and the president could still claim the stimulus was a success, since it could have been worse. Here, the GOP conference ignores this argument entirely, as it so often does, by pointing to negative raw data and ignoring the Democrats’ argument that you have to compare them to a far more catastrophic baseline. Obama’s critics on the left often do the same to conclude that the stimulus was much too small.
I tend to sympathize with the administration on this. It’s shocking how quickly people have forgotten the rank fear that pervaded the country in late 2008 and early 2009. As with the Troubled Assets Relief Program, approving the stimulus was important if only to prove that the government would not let the economy fall off a cliff. At the same time, policymakers had to pay attention to folks worried — without much reason in the short-term, it turned out, but it was hard to know that then — about inflation and the willingness of private capital to finance American government debt at low interest rates. How do you quantify the number of jobs saved from ministering to such psychological preoccupations? It’s hard, but it doesn’t mean they weren’t saved.
As the joke goes, this is the reason why there are no one-handed economists; they are always saying: “on the one hand, on the other…” But, in the second year of the stimulus, it has become a lot harder to argue that Keynes is cool, and it is a lot easier to contend that tightfisted Angela Merkel, though a physicist by training, has a better knack for economic management than the Bloomsbury Sage—at least 74 years after he published his General Theory.
OK, it is silly to draw so much conclusion from so little evidence, and, whatever the gainsayers argue, Obama will throw more money at the economy as the midterms draw closer. But think of the issue in the simplest of terms: As a businessperson or consumer, would you now spend your money in the face of a rising deficit that is guaranteed to bring on either inflation or tax hikes or both? Maybe you can find the answer in the Holy Writ that is the General Theory. Confidence matters, and this is what the great man had to say in Book III: “The government program may, through its effect on ‘confidence’, increase liquidity-preference or diminish the marginal efficiency of capital, which may retard other investment…” Translation by Joffe: “The stimulus may lead to cash-hoarding and, by depressing the return on capital, diminish private investment.” Keynes may have been wiser than his disciples.
The truth is that you can’t prove whether the stimulus worked or not. You can try to reconstruct the effects of the stimulus (and other government interventions) as Alan Blinder and Mark Zandi did. But you’re still making assumptions on the basis of economic models — mainstream assumptions shared by most economists, but assumptions nonetheless. Actually proving the case would require going back to 2009 and re-running history with everything the same but no stimulus. Since we can’t do that, all we can do is guess.
Of course, Republicans aren’t making a good faith effort to gauge the effects of the stimulus. They’re simply looking for a pseudo-economic argument that allows them to blame Obama for everything that has happened since the economic crisis of 2008. Lindsey’s article is a rationalization for that political strategy.
Chait is right. The reason we don’t know whether the stimulus has worked in the United States is fundamental. And I believe it has significant implications for how we should approach public policy in the recession.
I believe that recognition of our ignorance should lead us to two important, though tentative and imprecise, conclusions.
First, we should treat anybody who states definitively that the result of stimulus policy X will be economic outcome Y with extreme skepticism. And weaseling about the magnitude of the predicted impact such that all outcomes within the purported range of uncertainty still magically lead to the same policy conclusion doesn’t count; we should recognize that we don’t even know at the most basic level whether stimulus works or not.
Second, “boldness” in the face of ignorance should not be seen in heroic terms. It is a desperate move taken only when other options are exhausted, and with our eyes open to the fact that we are taking a wild risk. Actual science can allow us to act on counterintuitive predictions with confidence–who would think intuitively that it’s a smart idea to get into a heavy metal tube and then go 30,000 feet up into the air? But we don’t have this kind of knowledge about a stimulus policy. We are walking into a casino and putting $800 billion dollars down on a single bet in a game where we don’t even know the rules. In general, in the face of this kind of uncertainty, we ought to seek policy interventions that are as narrowly targeted as is consistent with addressing the problem; tested prior to implementation to whatever extent possible; hedged on multiple dimensions; and designed to be as reversible as is practicable.
What I am trying to describe here is not a policy per se, but an attitude of epistemic humility.
Manzi is a much nicer person then I am, so it’s no surprise that I will return the favor of him saying that I’m right by replying that he’s wrong. Here are a few of the problems with his case. First, and more importantly, I was arguing that the precise effect of the stimulus can’t be measured. That doesn’t mean we have no idea whether it worked. There is a general, though not unanimous, consensus within the economic field that increasing spending or reducing taxes temporarily increases economic growth. Basically, we do know the rules — increasing the deficit in order to pave some roads and cut taxes for middle-income people will increase the size of the economy; the primary debate is just how much.
Now, it’s true that the conservative movement has invested a great deal of time into throwing cold water on this basic consensus. I think this campaign should be viewed as largely political. Private forecasters unanimously believe that fiscal stimulus can temporarily boost growth. They give no credence whatsoever to the various right-wing alternative models in which fiscal stimulus does not boost growth. Moreover, in 2001, when the objective case for fiscal stimulus was much weaker, there was no real debate about the efficacy of fiscal stimulus. The fact that Republicans are fiercely contesting the merits of fiscal stimulus now, while almost nobody was doing so when the case was much weaker in 2001, suggests that the right’s skepticism is a political phenomenon.
Second, we are not really taking a “wild risk” by devoting $800 billion to mitigating the deepest economic crisis since the Great Depression. The long term fiscal cost of the stimulus is quite minimal:
The opposing risk, of allowing an economic free-fall, seems much greater. The risks of a depression are enormous. Of course, one side effect of such an outcome would be massive political gains for the opposition party. No doubt this helps explains the more sanguine attitude Republican elected officials — I am not implicating Manzi here — took toward the 2008 crisis, as opposed to their urgency in the face of the far more shallow 2001 recession.
Third, Manzi suggests that remedies be as narrowly targeted as possible, reversible, and tested prior to implementation. The stimulus was pretty narrowly targetted. It consisted of spending and tax cuts designed to increase consumption. It is completely reversible in the sense that the spending and tax cuts are temporary.
Being “tested,” as I noted, is not possible. But it’s not possible to test very much in macro-economics. We can’t run natural experiments with whole economies without the aid of time travel. Manzi’s analogies of flying in an airplane assume is that there’s some safe, default option — staying on the ground, keeping away from the casino. That isn’t a realistic way to think about economics. Doing nothing in the face of economic catastrophe is a policy choice. To the extent that it’s been “tested,” it’s been shown to produce terrible results. The better attitude than trying to imagine some safe default course of action, I’d suggest, is to hew to precepts generally accepted within the economics field.
Chait begins his reply by claiming that I “oppose any stimulus at all.” This is a position which I did not present in the post, and which I do not hold. In fact, I have consistently advocated stimulus in the face of the current crisis, and generally in venues that are not as hospitable to this idea as The New Republic.
I was arguing in my post that we should approach stimulus with appropriate humility about our knowledge, not that we should never execute such a policy. That’s why the sentence in my post that immediately follows those Chait excerpted, is: “What I am trying to describe here is not a policy per se, but an attitude of epistemic humility.”
Chait then moves on to criticize the reasoning behind my imagined position against any stimulus spending.
His first argument is that he was only saying we can’t measure stimulus precisely, but that we still know enough to act with confidence:
First, and more importantly, I was arguing that the precise effect of the stimulus can’t be measured. That doesn’t mean we have no idea whether it worked. There is a general, though not unanimous, consensus within the economic field that increasing spending or reducing taxes temporarily increases economic growth. Basically, we do know the rules — increasing the deficit in order to pave some roads and cut taxes for middle-income people will increase the size of the economy; the primary debate is just how much.
Now, it’s true that the conservative movement has invested a great deal of time into throwing cold water on this basic consensus. I think this campaign should be viewed as largely political.
Chait correctly identifies this as the most important of his arguments, so I’ll spend the most time replying to it. The problems with this criticism are that: (1) it is false, (2) it is a straw man, and (3) by far most important, it doesn’t address my point.
1. It is false.
Chait is trying to define the position that stimulus will not increase output as intellectually illegitimate. (Though, again, this is not a claim that I have made.)
It is certainly true that a large majority of professional economists accept the view that “increasing spending or reducing taxes temporarily increases economic growth”—but that is very far from claiming that disputing it is largely a political campaign. Robert Barro, Professor of Economics at Harvard, John Cochrane, Professor of Finance at the University of Chicago, and Casey Mulligan, Professor of Economics at the University of Chicago, have each separately argued that it is somewhere between plausible and likely that the multiplier for stimulus spending under relevant conditions is indistinguishable from zero (i.e., that stimulative spending will not materially increase economic output). According to surveys of professional economists reported by Greg Mankiw, about 10 percent of economists do not agree with the statement that “Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy.” Both the Wall Street Journal and the Financial Times have run opinion columns expressing the view that a multiplier of zero is a plausible to likely theory.
I have not been afraid to call out influential conservative activists when I believe they are engaging in crank refusal to accept a scientific finding. But in a genuinely scientific field which has accepted a predictive rule as valid to the point that there is a true consensus—such that the only reason for refusal to accept it is crankery or, in Chait’s terms, “politics”—you don’t usually see: several full professors at the top two departments in the subject, when speaking directly in their area of research expertise, challenge it; 10 percent of all practitioners in the field refuse to accept it; and the two leading global general circulation publications in field running op-eds questioning it.
2. It is a straw man
If the U.S. government were to borrow and spend $1 trillion with the sole result of increasing U.S. GDP in Q4 2010 by $1, it would have “temporarily increased economic growth”—but no sane person would advocate such a policy. It would not be, in either the common-sense meaning of words, or in the terms of my post, a stimulus policy that “worked.” The relevant policy question is whether stimulus spending “temporarily increases economic growth” enough to make such a policy rationally advisable . Economists are all over the place on their estimates for impact of stimulus policy across the range that is relevant to the policy decision.
A great many leading economists may accept the proposition that enough stimulus spending will probably cause at least some increase in output for a short period of time in some circumstances, yet are still uncomfortable with the kind of stimulus spending strategy that is the actual subject of current political debate. In 2009, James Buchanan (1986 Nobel Laureate in Economics), Edward Prescott (2004 Nobel Laureate in Economics), and Vernon Smith (2002 Nobel Laureate in Economics) promulgated this statement:
“Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance.”
3. It doesn’t address my point
It is nerdy-sounding, but I believe critical to this discussion, to distinguish between measurement and knowledge. I made a very strong claim about measurement, and a very specific claim about knowledge.
I claim that we cannot usefully measure the effect of the stimulus program launched in 2009 at all. We can call this a “natural experiment” all day long, but in the absence of a control case, we cannot know what output would have been had we not executed the policy. Econometric models are not sufficient to estimate this counterfactual. Therefore, there is no achievable level of output in the United States in 2010, 2011, and so on that would enable a definitive answer to the question, “What was the effect of stimulus spending on output?” See, for example, in my original post, the response of leading economists when confronted by unemployment with stimulus that turned out to be higher than they projected unemployment would be without stimulus:
Ms. Romer famously projected in January 2009 that without government support, the unemployment rate would reach 9%, but with support the government could keep it under 8%. It’s 9.5% today.
Some Obama administration officials privately acknowledge they set job-creation expectations too high. The economy, they argue, was in fact sicker in 2009 than they and most others realized at the time. But they insist unemployment would have been worse without the stimulus.
All potentially useful predictions made about the output impact of the stimulus program are non-falsifiable. Failure of predictions can be simply justified by this sort of ad hoc explanation after the fact.
Specifically, he cites the fact that the University of Chicago’s Barro, Fama, and Mulligan are stimulus skeptics, and according a survey from Mankiw, so are 10% of all economists. But I don’t think 10% of economists and a handful of high-profile experts disagreeing is sufficient to say there is not a strong consensus.
For economics 90% agreement is a pretty high level of agreement, and I would be surprised to find a consensus much stronger on that on most issues. From a survey of economists by Whaples we can see that ”only” 87.5% of economists agree that the U.S. should remove all remaining tariffs and trade barriers, 90.1% believe that employers should not be restricted from outsourcing jobs, 85% agree that subsidies to agriculture should be removed, and the same percent say it about sports subsidies as well. From another survey of economists, 87.5% agree that the U.S. trade deficit is not primarily due to other nations’ nontariff trade barriers, 83.5% agree or agree with provisos that tax policy can affect the long-run rate of capital formation, 93% agree that pollution taxes or tradeable permits are more efficient than emissions standards, 92.9% agree or agree with provisos that flexible exchange rates are effective, and 92.6% agree that tariffs or import quotes reduce the general welfare of society.
Despite the disagreement by 7% to 17% of economists on these issues I would argue that are all accurately characterized as representing as a strong consensus. Whaples calls the agreement in those examples a “consensus” and “an overwhelming majority”, and Fuller and Geide-Stevenson, the authors of the other paper, explicitly refer to those examples as representing a “strong consensus”.
Yet I’m certain that on each of these issues you could find experts at the top 10 economics departments that agree with the minority position. Stiglitz alone will probably disagree with more than half of them, and you won’t have to look hard to find a half a dozen other Ivy League dissenters.
My point is not to disagree with Manzi that a strong consensus means it is okay to call anyone who disagrees with the consensus a “crank” or “politically motivated”, but just to point out that the bar he’s set for a “true consensus” pretty much means that there’s is no “true consensus” on important issues in economics. Then again, he may very well agree with that point.
Jim Manzi and I are kindred spirits on the issue of epistemic humility. Out in the real world – as opposed to the whiteboard – only one thing is for sure and that is that this is all going to end very, very badly. The long run is not your friend.
In the mean time, little is for certain. In particular, we are not clear on exactly what the consequences of economic stimulus were. However, it is important to clarify what some economists may have meant by stimulus skepticism.
I wrote frequently in the weeks leading up to the passage of the stimulus that I was a stimulus skeptic. I signed a letter offered by John Boehner for economists who believe that IIRC, stimulus is not the best way to revive our economy.
At no time, however, did I believe that stimulus would have no effect on output. That is, unlike what I believe to be Mulligan and Fama’s stance, I did not believe that labor markets always clear.
What I did think is that I wanted to take what, even then, seemed like enormous monetary risks. It has been rumored that Tim Geithner suggested securing the assets of all major banks in the United States. While I didn’t formally support that, it did not seem absurd to me. Nor, did massive nationalization of the banking system and certainly not aggressive purchases of government securities.
While taking on all of these risks I didn’t see the need to add the confusion and inevitable political food fight of stimulus on top of it. Moreover, if one was going to do a stimulus it seemed much more sensible to simply slash the payroll tax. The bang for the buck would have been less but you can cram a whole lot more bucks through the payroll tax system than you can through the appropriations mechanism. Additionally, the public choice issues in cutting the payroll tax were much more manageable.
The point of all of this is that I listed myself as a stimulus skeptic but I wasn’t at all skeptical about the stimulating powers of government spending. I was skeptical as to whether that was the ideal course of action. That skepticism was as much rooted in my understanding of American political dynamics and my own tolerance for risk as in any scientific claims about macroeconomics.
There has been a lot of very thoughtfuldiscussion lately about the obesity epidemic facing this country. All I have to add to this insightful and informed conversation is a comment on and picture of a turn-of-the-century sideshow freak
This is Chauncy Morlan, and around 100 years ago his obesity was so shocking that people would pay money to see him as he toured the country as a circus “fat man”. I find the unremarkableness of his size to be a telling sign of how we’ve pushed the limits of obesity in the past 100 years. Imagine, if you will, what society would look like if 100 years from now if what passed as spectacularly obese today would not even turn heads at the mall.
Here, courtesy of Adam Ozimek at Modeled Behavior, is a picture of Chauncy Morlan (1869-1906) who, because of his “freakish” weight, people once paid good money to see as he toured Europe and America with the Barnum & Bailey circus. Although a tinge of freakishness still attaches to shows like The Biggest Loser the dominant theme is a feeling of camaraderie and the hope that if the contestants can lose weight then so can anyone with similar problem and goals.
What would the circus goers of 1890 have thought if they were told that in the America of 2010 Chauncy Morlan would be unremarkable?
In the early 1900’s, he made a career of being fat. He was a circus performer that people paid money to gawk at – on the very edge of the weight sensibilities of the time. Go on, click the link. That man made money from being that obese. I don’t need to comment on this. The comments of that site say all I need to.
Alex wonders, “What would the circus goers of 1890 have thought if they were told that in the America of 2010 Chauncy Morlan would be unremarkable?”
Cellania quips, “People paid money to look at him, because he was so unusually obese. A hundred years later, you can walk into any buffet restaurant and see a dozen people bigger than Morlan.”
Admittedly, Morlan doesn’t look fat enough in that picture that I’d pay to see him. But, in actuality, Morlan was 512 pounds at age 18 and was reputedly well over 600 pounds later in life. That’s hardly “unremarkable” even now.
30-year mortgage rates have dropped back down to their record low mark. There are generous government tax credits in place for virtually all Americans to buy a home. Foreclosures also remain high, meaning that there’s significant pressure on prices — it remains a buyer’s market in most areas. Those factors combined sound like a good recipe that should result in a great time to buy a home.
The news about the mortgage rates hit today. Here’s a bit of detail via Reuters:
U.S. 30-year mortgage rates dropped in the past week to match a record low set in April, while the 15-year home loan rate fell to a new all-time low, home funding company Freddie Mac (FRE.N) said on Wednesday.
The average 30-year rate dropped 0.05 percentage point to 4.78 percent in the week ended November 25, equaling the lowest rate since Freddie Mac started tracking rates weekly in 1971.
Clearly, this and the other incentives to buy probably aren’t too helpful if you’re a part of the 10.2% of Americans who are unemployed. But for anyone who feels their job is secure and can afford it, might it be a good time to buy a home or upgrade to a bigger place?
Despite all those good reasons to do so, it depends. I think short-term real estate speculation is probably still ill-advised. Even if home prices have hit the bottom, I don’t think they’re likely to increase quickly over the next several years. So if you’re hoping to get in and get out, you might be in for a rude awakening.
But if you’re in the market for a home as a long-term investment, say at least 10-15 years, it’s pretty hard to make an argument against buying now. Even if we aren’t at the precise bottom, it’s hard to believe that home prices could plummet much further in most areas. And even if they did continue to decline a little, the tax credit might make up for most or all of that decline anyway. For anyone who can find an especially good deal on a foreclosure or short-sale property, I find it even more difficult to argue against buying.
It seems the housing speculators are back, and Daniel Indiviglio is joining their ranks, now that mortgage rates are back at record lows. “If you’re in the market for a home as a long-term investment, say at least 10-15 years, it’s pretty hard to make an argument against buying now,” he says.
It’s hard to know what to make of this. Some people are looking to buy a home — that’s understandable, given that everybody needs shelter. And some people are looking to invest money with a long-term time horizon. And some people even fall into both categories at once. But that’s no reason to desperately try to conflate the two, and to describe yourself as being “in the market for a home as a long-term investment”.
It bears repeating: homes aren’t investments, they’re places to live. If you can buy a nice house for less than you’d otherwise pay in rent, then go ahead and buy — no matter what the market looks like, or where mortgage rates are. On the other hand, if you’re looking for an “investment”, stick to securities. You can sell those much more easily when you need some money, and they won’t drive you into possible bankruptcy and homelessness if they go down rather than up.
In any event, low mortgage rates are if anything a reason not to buy: after all, the best way to make a lot of money in the housing market is generally to buy when rates are high and sell when rates are low. If rates rise from here that will keep a lid on prices, and if they fall then there’s no particular reason to buy now.
Felix is arguing that housing should only be considered a consumption good, and you should only be willing to pay the net present value of the future stream expected rents. In fairness, Daniel at least concedes that housing is inherently an investment, whether you want to speculate or not. He does, however, ultimately agree with Felix that “If you’re looking to use capital in order to speculate on an investment to maximize return, then by all means do not buy a house now or ever”. Both seem to be suggesting that securities or other investments are perfect substitutes for housing investment, and even more than that they’re arguing that securities are always better investments. There are several reasons why housing as an investment is different than securities in a way that makes it an optimal investment for some people.
I should note that I’m not arguing that now is the time to buy, or that I would even know when that was. I am simply arguing that sometimes owner-occupied housing investment is optimal as an investment and as consumption.
It is also important to note that many of the benefits of housing investment given below are actually driven by the fact that you live your house, which means a lot of the investment benefit of buying a home is inseperable from living in it. Contra Felix, there is definitely good reason for some people to conflate the consumption of and investment in housing.
1: Leverage – Securities are not a perfect substitute for housing investment because two 20-somethings with steady jobs and good credit scores can’t get a 80% LTV loan for $200,000 to buy stocks and bonds. You can, get that loan to buy an owner-occupied house. The reason you can borrow heavily to invest in a house and not securities is that you live in the house, and so banks have a greater confidance you will pay them back. You can make a hugely leveraged bet on a housing investment that you can’t on securities. This alone makes housing investments very different than securities.
2: Diversity – Housing markets are very local in a way that securities are not. As this paper by Bosch, Morris, and Wyatt shows, housing can be an optimal investment if it’s covariance with the rest of your portfolio is low. There’s no security that allows you to invest in a neighborhood like a house does, and diversify your portfolio in the same way as investing in a home.
3: Rental Price Risk – Buying a home allows you to insure against rental price increases and volatility. Say you live in a neighborhood that you believe is going to clean up, crime will go down, housing stock will improve, and rent is going to go from $500 a month now to $1,000 in three years and then grow at 8% a year perpetually. Investing in a house allows you to insure against having to pay that higher rental price in a way that rental markets may not. Long-term leases may be available, but they may not.
4: Local Markets – When you speculate in the market for securities your investing in a highly liquid, highly global market where your ability to “spot a deal” that the market hasn’t is slim to none. Housing markets are extremely local; block by block even. It’s much easier to spot a trend that others haven’t, and have local knowledge that others don’t, when the relevent market is your neighborhood. The idea that you’re better at predicting future prices on your block than all your neighbors, and even all the rubes in your town, is a lot easier to believe than it is to believe you’re better than the market at predicting the future path of G.M. stock. Your knowledge of local markets may also allow you to make improvements to your asset to increase it’s value in a way that matches the local tastes. This might even be a skill of yours. You can’t make improvements to GM stock.
Maybe Salmon would be more comfortable if we talked about economic tradeoffs instead of investments? Back when I was considering buying a place, I created a complex model to evaluate if it made economic sense to do so, given what I would pay renting. In it, I imagined that I would invest the money I saved by renting in some alterative investment instead of the home. The numbers never came out in favor of buying, given my situation. So I never did. Of course, investors and businesses perform similar analyses when determining which “investments” in securities or equipment to spend their cash on.
I don’t think Salmon and I really disagree about the heart of the matter when it comes to real estate. It doesn’t make sense for everyone to buy, but sometimes it certainly does. With interest rates at historic lows, it might make renting comparably less attractive than it used to be for some people, since they can get more house for a lower monthly payment.
But just to be clear, what I’m not arguing in favor of is “speculation” in the real estate market. That’s what drove my 10-15 year time horizon qualification — I don’t know any housing speculators had time horizons that long. In the short-term, real estate prices will likely have some volatility and poor liquidity. But in the long-term, the housing market should again have its usual level of decent liquidity and low, but consistent, appreciation. A longer time horizon will also allow sellers to wait until the economic cycle brings lower interest rates again to entice buyers, another concern that Salmon cites for buying now.
Do you ever get the feeling that you must be right about something just on the strength of how ludicrous people sound when they argue against you? Take this, in defense of housing-as-an-investment:
Say you live in a neighborhood that you believe is going to clean up, crime will go down, housing stock will improve, and rent is going to go from $500 a month now to $1,000 in three years and then grow at 8% a year perpetually…
And say that you’re right, and say that no one else is as perspicacious as you are, which means that houses in that neighborhood are still cheap. Then yay, you’ve just found a gold mine!
Except, beware confirmation bias. “Housing markets are extremely local; block by block even. It’s much easier to spot a trend that others haven’t, and have local knowledge that others don’t, when the relevant market is your neighborhood,” continues Adam Ozimek.
I’ve got many friends who bought houses in London or NYC, saw both rents and property prices soar, and ended up making mark-to-market profits often exceeding their total lifetime earnings. That’s a good sign of a bubble, but at the time it seems like a sign of farsighted and insightful investment prowess. The point is that either property prices in general go up, or else they go down. Real estate is pretty much never a good investment in a down market, no matter how granular and detailed your local knowledge is. Meanwhile, in an up market, it doesn’t matter much either. Yes, that gentrifying neighborhood is going up in value. But so’s the old-money neighborhood a mile away, and so’s everything else in a 20-mile radius.
Remember that it’s sometimes not a good idea to buy a house even if your total monthly payments are lower than what you would be paying in rent on the same place. If prices fall, rents can fall too: just ask any landlord in New York City. And while the renters next door are happily renegotiating their lease so they pay $300 a month less than they were paying last year, you’re stuck with the same fixed mortgage for the next 30 years. If only you’d held off buying, your monthlies would be lower while renting, and you could buy now, if you were so inclined, at a lower price. Price the option: if you’re renting, you always have the option to buy. If you already own, you don’t.
Ozimek has other arguments, too, including the novel one that house investments are inherently leveraged while other investments aren’t. Well, yes, exactly. What that means is that a house can make you bankrupt in the way that other investments can’t: you can lose more money than you invested. And then there’s the bit about the “covariance with the rest of your portfolio”. OK, I’ll grant you that one: if the value of your home (not your downpayment) is somewhere in the region of 5% to 10% of your net worth, then congratulations, you’re very rich, and you can go ahead and buy what you like. For 99% of us, buying a home means putting our overall portfolio massively overweight real estate. And the only real way to justify that is precisely because a home is not an investment.
I thought the tax subsidies and the fact that I liked the place made it worthwhile for me to buy a condo a bit more than a year ago. In the future, it might be worth more than what I paid. But if it is, that will almost certainly be because DC-area property in general has increased in value. So if I, say, need to move into a bigger place to have kids then an increase in property values isn’t going to help me. Sure I’ll “make money” on selling my existing place, but I’ll just need to pay more for a new place.
To really make money in this way you need to be some kind of major property owner, not an individual who needs to live in his house. Which should serve as a reminder that contrary to the way it’s discussed in the press, unless you own some vast array of properties around the country expensive real estate is a bad thing. If real estate values go up in an area that can often be the result of overall improving conditions, but the pricey real estate is a net negative. Real estate—housing, office space, etc.—is a cost to households and businesses. When real estate is cheap, people can get space at low cost and spend their resources on other things. What serves people’s interests is not expensive real estate and a fruitless quest to make money speculating on property, but cheap real estate and the ability to have a nice place to live and also money left over to buy furniture.
Look, there’s no doubt that there’s risk in buying. Sometimes, prices go down for the short term and, yes, that means you might have been able to rent comparable housing for less. On the other hand, prices frequently go up. And a mortgage locks in the initial rate.
Beyond the rise and fall of prices, the main investment advantage of purchasing a home is that the tax code allows writing off mortgage interest. For those in expensive real estate markets, that’s a huge incentive.
To be sure, there are downsides to home ownership — higher maintenance costs, constraints on mobility, transaction fees, etc. — that make it a bad decision for many people. If you’re likely to be moving in the next couple of years, it’s likely a bad idea. If your expected income is such that making rent or mortgage payments is about all you can handle — and therefore an unexpected major repair would be crippling — it’s definitely a bad idea. But for most of us, buying just makes sense over the long haul.