Homeownership, Mobility, and Unemployment

One of the themes I've been pushing in a series of posts is that geographic mobility lessens the impact of economic downturns and helps bring the economy back to its "normal" equilibrium. When Los Angeles lost lots of jobs in the defense industry in the 1991 recession, many people were willing to move to areas that were not affected by the downturn. That made it easier for the folks who remained in Los Angeles and it improved the job prospects of those that moved.

Much is made of the idea that home ownership creates positive externalities but for the most part we overlook the drawbacks. It is a part of the American Dream after all. Tim Hartford had a great column on the effects of homeownership recently (slate). Tim writes:

Wherever people seem particularly keen to own their own homes—as in the United Kingdom, Spain, and some U.S. states—employment suffers as a result. English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of unionization don't explain unemployment nearly as well as the tendency to own houses. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.

A Newer, Better, Softer Socialism?

Anyone who speaks glibly of "spreading the wealth around" sees wealth not as resulting chiefly from individual effort, initiative, and risk-taking, but from great social forces beyond any private producer's control. If, say, the low cost of Dell computers comes mostly from government policies (such as government schooling for an educated workforce) and from culture (such as Americans' work ethic) then Michael Dell's wealth is due less to his own efforts and more to the features of the society that he luckily inhabits.

That's Don Boudreaux (GMU) in the Christian Science Monitor (CSM). Check it out.

Editors of Seed Endorse Senator Obama

Read about it here. I think this mostly represents the consensus of the scientific community. The main rationale:

Sen. Obama's pledged stance on science resonates with us. He has vowed to restore integrity to the role of science advisor by reestablishing the senior status of the Assistant to the President for Science and Technology, and more broadly, by surrounding himself with individuals with exemplary scientific credentials; his selection of Dr. Harold Varmus as the campaign's science advisor was a very promising and laudable step in that direction. Sen. Obama understands that basic research is fundamental to how scientific advances are made. He sees the importance of expanding funding for "high-risk, high-return" work, strengthening tax policy to spur R&D, and encouraging the careers of young scientists who pursue innovative lines of thinking. He has offered a comprehensive plan to reinvigorate math and science education, and he recognizes the vital importance of re-architecting nationwide science literacy for these times. His positions on topics ranging from agriculture, alternative energy, and medical research to internet policy, patent law, and space are more robust and ultimately more in line with scientific consensus than those of Sen. McCain.

Like DrugMonkey however, I have some concerns about using science as a governing framework, which they advocate in the next paragraph.

The Housing Downturn and Mobility

In an earlier post I talked about the widespread nature of our current recession and how much different it would be from our previous two, which had very different regional impacts. One part of the story is that there are currently few good places to move. Another part is that high homeownership rates make people less likely to move. On this second point economists Fernando Ferreira, Joseph Gyourko, and Joseph Tracy examine one piece of the puzzle. The authors study what happens when homeowners end up with negative equity in their houses. The paper, “Housing Busts and Household Mobility,” is here. From the abstract:

Using two decades of American Housing Survey data from 1985 to 2005, we estimate the impact on household mobility of owners having negative equity in their homes and of rising mortgage interest rates.

We find that both lead to lower, not higher, mobility rates over time. The impacts are economically large, with mobility being almost 50 percent lower for owners with negative equity in their homes.

Kurt Cobain, Entrepreneur

The blog Lateral Action is quickly becoming one of my favorites. Brian Clark, a co-founder, did the post on Fight Club and creativity that I linked to in an earlier post and now he has a new post on the drive and creativity of Kurt Cobain: The Kurt Cobain Guide to Startup Success (LA). He describes how Cobain and his band mates were entrepreneurial and uses Nirvana to illustrate several principles of entrepreneurship.

Richard Florida is probably the only other blogger who recognizes and really gets the links between entrepreneurship, creativity, and music (see here for example.)

Inside the Entrepreneurial Mind

Seth Godin and Tom Peters discuss a range of topics in a series of short video clips (open forum). Highly recommended. Ben Casnocha recommends three clips in particular.

Technology Policy Smackdown

Apparently Wired and The New America Foundation are aiming to improve the level of discourse on technology policy. The event is full, but there will be a webcast.

The specifics:

Representing Sen. McCain will be the campaign's chief economic policy adviser, Douglas Holtz-Eakin. Representing Sen. Obama will be former FCC Chairman Reed Hundt.

When: October 30, 12:30 - 1:45.

See the New America Foundation for more. (HT) I hope they drop a microphone from the ceiling for the moderator.

Developing the Open Source Car

At a panel at Convergence 2008, a Microsoft sponsored event, BMW announced that it had developed a Linux based operating system to run some of their entertainment components and called on other automakers and OEM's to work together to make open source the future. Several companies, like Honda and Ford, currently use Windows based systems. BMW said it wants to sell 200,000 open source cars in the next 5-7 years.

From Automotive News Europe (ANE):

"We were convinced we had to develop an open platform that would allow for open software since the speed in the infotainment and entertainment industry requires us to be on a much faster track," said Gunter Reichart, BMW vice president of driver assistance, body electronics and electrical networks. "We invite other OEMs to join with us, to exchange with us. We are open to exchange with others."

An open-source platform fosters innovation by allowing software vendors and Linux users to share ideas, fix problems and contribute code. The result is a platform that offers plug-and-play compatibility for infotainment products from any vendor.

Thanks to my friend Matt for the link. Competition for operating system dominance extends well beyond conventional desktop computers and these new battlegrounds are among the most interesting.

The Rand Corporation

I've always had a tremendous amount of respect for the work that Rand's scholars produce and I think it would be an amazing place to work. When I was looking at graduate programs I seriously thought about doing a PhD in their public policy program. While I am mostly interested in the economic projects, the early history and focus of the organization is fascinating. When I was in college I read Wizards of Armageddon by Fred Kaplan. It covers the institution as well as the post-WWII era in good detail and I thought it was an excellent book. For anyone interested in learning more about Rand I would recommend it.

I thought about Kaplan's book recently when I saw Soldiers of Reason: The Rand Corporation and the Rise of American Empire by Alex Abella. The book is being billed as the first popular study of the Rand Corporation, which obviously it isn't. Perhaps it is very good, but I have not read it. If you have an interest in Rand you might take a look.

Innovation Matters

Mark Cuban nails it (Blog Maverick):

The cure for what ails is us the Entrepreneurial Spirit of this country. We are a nation of people who encourage , support and invest in those of any and all age, race and gender who will use their ingenuity and come up with a new idea.

Technology Downturn

According to TechCrunch's Layoff Tracker 19,683 people have been laid off from technology companies since mid-September (TC). And 13,809 have been laid off in the past week alone. The job losses are highly concentrated: 5 big firms like Dell and Xerox account for about 90 percent of this total. Only 573 were laid off from startup companies. The situation is clearly pretty bad, at least without knowing what the other side of the equation looks like. That is, firms often let workers go in one department while simultaneously hiring in another. It is the net that we care about. Despite this minor qualm, the picture clearly looks bad and the number TechCrunch reported is an underestimate (see their post for more.)

Coincidentally, cnet has a list of 14 things to do if you get laid off from a tech company (cnet.) Number 1 caught my eye:

1. Get involved in an open-source project
It's where the most interesting and influential products are being developed, and more importantly, many open-source projects are filled with people who are also connected to companies that pay their engineers. Plus, obviously, working on a development project will keep you sharp and expand your skill set.

A friend and fellow classmate just presented some research on social capital and the open source movement. I didn't attend the workshop but David Miller has the scoop along with a pdf of the slides (Campus Entrepreneurship). Slide 10 is particularly relevant, since it looks at the motivating factors for contributing to the open source movement. I think that the work by Lerner and Tirole best captures the cnet idea that open-source projects can be a fantastic social network that can help in down times.

Recessions and Geographic Mobility

I spent part of Wednesday at a National Association of Home Builders (NAHB) conference on the outlook for housing and the economy and one of the presenters, sorry but I forget who, made a great point about the regional impact of recessions. The point was that in the past a recession would hit one or two areas harder than others but that other areas would muddle through and perhaps even prosper.

In the 1991 recession, for example, California, and especially the Los Angeles region were particularly hard hit because of cuts in the defense industry. But other surrounding areas did okay and people could move to Las Vegas with reasonable hopes of finding good work. More recently, when the tech bubble burst, California, Boston's Route 128, and a few other areas were particularly hard hit, but again other regions did fine. Moving to Nevada, Arizona, Oregon or other parts of the northeast was a viable option.

This go round however, things look a lot worse. While many of the housing problems are concentrated along the coasts, former boomtowns like Las Vegas no longer offer sanctuary. In fact, aside from a very small sliver in the Midwest, there are few places that won't be negatively affected. Add to this record homeownership rates and we'll likely see less mobility than in previous recessions. Because we are unlikely to see this mobility, unemployment will likely carry on longer than if people were able to move to more successful areas. While all of this may seem depressing, and let's face it, it is depressing, now might be a good time to think about what cities have brighter futures.

Earlier this year Forbes covered some research that Phil did on up-and-coming-tech centers (Forbes). Forgive me for ruining the suspense, but the top city in the study was Columbus, Ohio. Surprised? “The cities on this list aren’t the places you’d expect to be up-and-coming centers for the next generation of technologies,” said [Philip] Auerswald [professor of public policy at George Mason University], “But 30 years ago, few would have imagined Las Vegas as the center of a real estate boom.”

Actually one of my best friends grew up in Ohio and the number 1 pick didn't surprise him a bit.

Update: My friend writes: "If you drive through Columbus, you can witness firsthand that it is a thriving city that is focused on the service sector. It did not get pulled down by the decline in manufacturing like the rest of the state did."

A Day in the Life

Guy Kawasaki has a great post about his 24 hours aboard the USS John C. Stennis, an aircraft carrier. He makes great use of photos, videos, and limited text. This isn't really a post about innovation or entrepreneurship, just a mild diversion. But as you read Guy's post, do think about how you spent yesterday.

It's Not Just Paranoia

They really are watching you. From InformIT:

What Does Google Know about You? And Who Are They Telling? Googling Security: How Much Does Google Know About You? is the first book to reveal how Google’s vast information stockpiles could be used against you or your business — and what you can do to protect yourself.

I am just passing this along; I have not read the book.

Here Comes Everybody

That's the title of Clay Shirky’s newest book. There's lots of great stuff in here. I liked this bit for example:

Communication tools don’t get socially interesting until they get technologically boring. The invention of a tool doesn’t create change; it has to have been around long enough that most of society is using it. It’s when a technology becomes normal, then ubiquitous, and finally so persuasive as to be invisible, that the really profound changes happen, and for young people today, our new social tools have passed normal and are heading to ubiquitous, and invisible is coming.

We are living in the middle of the largest increase in expressive capability in the history of the human race. More people can communicate more things to more people than has ever been possible in the past, and the size and speed of this increase, from under one million participants to over one billion in a generation, makes the change unprecedented, even considered against the background of previous revolutions in communications tools.

Many of the ideas in the book are not new, and most have already been treated in earlier works, but if you only want to read one book about recent changes in information and communication technology (ICT), this would be it. It is hard to excerpt because the thoughts extend across paragraphs and don’t make for good soundbites. And it is refreshing to read a communications book by someone who understands the lump of labor fallacy (See Krugman for a great article about the fallacy, in the form of a book review, although he never mentions the term directly.)

Here’s a more detailed review. Cory Doctorow has a gushing review at BoingBoing and links to a talk by Shirky at Harvard. On a personal note the title bugs me since I cannot get You All Everybody from Lost out of my head, and yeah, I get that is not the right reference to draw. Also, the blogging wife was quick to point out that the photo for the book’s cover (US version) is not very representative - everyone is white. Whoops.

A Profile of Entrepreneur Henry J. Kaiser

An engaging profile by Randall O'Toole, the antiplanner.

Tyler Durden's Rules for Creative People

As you might guess, this is a lighter post than normal. The blog Lateral Action lists 8 rules you can use to transform yourself into a more innovative person or to create more innovative content. The post is based on lines from the book/movie Fight Club. You don't have to be a fan of the movie to find the post interesting, so check it out and then get busy doing what you want with your life, and doing it better. (HT)

Innovation Booms and the Stock Market

Tom Nicholas, a professor of entrepreneurial management at HBS, has a timely article in the September issue of the AER entitled, "Does Innovation Cause Stock Market Runups? Evidence from the Great Crash." The abstract (AER):

This article examines the stock market's changing valuation of corporate patentable assets between 1910 and 1939. It shows that the value of knowledge capital increased significantly during the 1920s compared to the 1910s as investors responded to the quality of technological inventions. Innovation was an important driver of the late 1920s stock market runup and the Great Crash did not reflect a significant revaluation of knowledge capital relative to physical capital. Although substantial quantities of influential patents were accumulated during the post-crash recovery, high technology firms did not earn significant excess returns over low technology firms for most of the 1930s.

Paul Krugman Links

1. NYT announcement
2. The Nobel’s Press Release and very thorough Scientific Background (pdf)
3. His old MIT website with assorted articles (MIT)
4. The Unofficial Paul Krugman Archive
5. Krugman’s blog (NYT)
6. His old Slate columns (”The Dismal Science“)
7. Paul’s best Slate piece
8. Ed Glaeser’s thoughts (NYT)
9. Dani Rodrik’s thoughts
10. An older profile of Krugman by Nicholas Confessore (WM)
11. Menzie Chinn offers his thoughts (econbrowser)
12. Daniel Klein has a critical review of his blog writings (Econ Journal Watch)
13. Peter Boettke is not impressed (Austrian Economists)
14. Russ Roberts offers his least favorite Krugman quote (Cafe Hayek)
15. Justin Wolfers has a good post (Freakonomics)
16. If you need even more Tyler Cowen and Alex Tabarrock each offer plenty of links.

I am sure I am missing a lot. Are there many comments by economists that I am missing? I would have expected more of his colleagues and former students to offer their thoughts. Perhaps tomorrow.

Paul Krugman Wins Nobel Prize in Economics

Announcement details here. Paul Krugman’s academic writing reflected a convergence of theory and a considerable amount of luck. From the early days when John Von Neumann created game theory and John Nash improved upon his ideas, game theory moved quickly through the social sciences. This happened especially fast in economics. By the time Krugman entered graduate school international trade theory was on the cusp of becoming inundated with these models. Industrial organization had already made the leap. What this meant was that Krugman, and a few others were at a unique time in history. Krugman writes:

Within a few months, I had written up a basic monopolistic competition trade model — as it turned out, simultaneously and independently with similar models by Avinash Dixit and Victor Norman, on one side, and Kelvin Lancaster, on the other. … From 1978 to roughly the end of 1984 I focussed virtually all my research energies on the role of increasing returns and imperfect competition in international trade. … What had been a personal quest turned into a movement, as others followed the same path. Above all, Elhanan Helpman — a deep thinker whose integrity and self-discipline were useful counterparts to my own flakiness and disorganization — first made crucial contibutions himself, then talked me into collaborative work. Our magnum opus, Market Structure and Foreign Trade, served the purpose of making our ideas not only respectable but almost standard: iconoclasm to orthodoxy in seven years.

My point is not to diminish Krugman’s work but simply to point out that this could have easily been a joint prize. Krugman deserves credit for recognizing what few others did and taking advantage of the changes in theory and methods. Also, to his credit, Krugman presented an elegence in his work that few others have matched. Here’s Krugman in his own words again:

The point of my trade models was not particularly startling once one thought about it: economies of scale could be an independent cause of international trade, even in the absence of comparative advantage. This was a new insight to me, but had (as I soon discovered) been pointed out many times before by critics of conventional trade theory. The models I worked out left some loose ends hanging; in particular, they typically had many equilibria. Even so, to make the models tractable I had to make obviously unrealistic assumptions. And once I had made those assumptions, the models were trivially simple; writing them up left me no opportunity to display any high-powered technique. So one might have concluded that I was doing nothing very interesting (and that was what some of my colleagues were to tell me over the next few years). Yet what I saw — and for some reason saw almost immediately — was that all of these features were virtues, not vices, that they added up to a program that could lead to years of productive research.

I was, of course, only saying something that critics of conventional theory had been saying for decades. Yet my point was not part of the mainstream of international economics. Why? Because it had never been expressed in nice models. The new monopolistic competition models gave me a tool to open cleanly what had previously been regarded as a can of worms. More important, however, I suddenly realized the remarkable extent to which the methodology of economics creates blind spots. We just don’t see what we can’t formalize. And the biggest blind spot of all has involved increasing returns. So there, right at hand, was my mission: to look at things from a slightly different angle, and in so doing to reveal the obvious, things that had been right under our noses all the time.

I’m not sure that I would say his models are trivially simple, but they are cleaner and simpler and more clearly demonstrate his point than most economists are able to do. He has a knack for spelling out what is most obvious and crucial but previously overlooked. Aside from his work in new trade theory, Krugman is famous for his popular writings and his textbooks. In fact, I first became interested in economics after reading Peddling Prosperity. Many of his other writings, like Pop Internationalism are also excellent.

Around GMU his work on spatial economics and economic geography are especially popular. There is much to like about his academic work and I do not think any other nobel prize winner has had an unoffical page dedicated to their writing (The Unofficial Paul Krugman Archive). In short, if you are only familiar with his NY Times column and blog, then you are missing the most interesting parts.

The Venturesome Economy

That's the title of Amar Bhide's new book (Amazon). It is highly recommended by Peter Boettke (GMU). If you do not want to wade through the whole book, here are some slides about the topic. I've gone through the slides but not the book, so just read Peter's post if you need an endorsement. I will get to the book soon, since it looks promising. I like his discussion of non-destructive creation and it is a topic I mean to blog about soon.

On Housing Prices

Casey Mulligan has a very interesting post on how far housing prices must fall (S&D). He estimates we still have quite a ways to go, at least looking at the Case-Shiller price index:

If real housing prices had followed inflation through July 2008, they would have been 27% below their actual values in July 2008. In other words, as of July 2008 housing prices had 27% more to fall in order to reach the real value they had for several years prior to the “bubble.” To put it yet another way, as of July 2008, the house price decline was not yet even half way complete.

Mulligan looked at the 10 years prior to January, 2000 and figured out the rate of growth in home prices. He found that they basically tracked inflation. He did the same thing for the OFHEO index. I went ahead and did the same for single family existing home sales. The graph is below. The red line shows the baseline case, i.e. what would have happened if housing had continued to increase at its previous rate. Instead you can see what happened.

In October, 2005 actual home values were more than $55,000 higher than the baseline projections. The spread was similarly wide in July, 2006 and at a few other times. Interestingly, the prices are fairly close now and suggest that prices only need to fall about 5% to reach the baseline case. This differs from the Case-Shiller index for a couple of reasons. First, this number excludes condos and multi-unit dwellings and looks at the relatively more stable single family housing market. And second, this is a national number as opposed to targeting a number of the hardest hit metro areas, like San Diego and Miami. Thus this series is not as "frothy." Having said that, for most people this measure might be comforting since it doesn't look like prices will have to fall that much more, at least for a lot of homeowners.


I generally won't focus on current economic conditions on this blog, but recent events in the housing, financial, and credit markets do have important long-run implications for the future health of our economy and our ability to create new jobs and new innovations.

While Wall Street Burns

In my previous post I wondered whether Prosper might emerge as a much larger and more successful company and whether peer to peer lending in general might soon appear more attractive than some traditional Wall Street institutions. A while back Steve Landsburg wrote (The Atlantic):

Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they’ll be able to find each other.

Alex Tabarrock concurs. A few days ago CNN ran a story about how small business owners are increasingly turning to nontraditional sources of financing (CNN):

Dubbed “social” or “peer-to-peer” lending, LendingClub and rivals like Prosper.com pair individuals willing to lend cash with borrowers who sign up with the site. Lenders flip through profiles of potential borrowers, who release their credit reports, to see descriptions of how they plan to use - and repay - the borrowed funds. If lenders see a listing they like, they chip in to help fund it, committing as little as $25 or as much as several thousand.

They didn’t point out that LendingClub is not currently accepting new lenders since they are in talks with the SEC, but once they get through all that they will be open for business again. Prosper is up and running, as I said above, but do check out prospers.org, since some allege that Prosper understates borrowers' true default rates. Buyer beware and all that.

Another alternative is Zopa, which is more socially oriented and provides a fixed rate of return, like a cd, just with a slightly higher rate of return. One of the themes we'll be touching on in upcoming posts is how successful, dynamic economies are able to deal with crises and shocks and divert investment into more profitable uses.

Envisioning the Next Innovation

Paul Saffo, a futurist associated with Stanford, recently gave a talk about what comes next in the information industry. An excerpt from mediabistro (fishbowlNY):

"If you want to look for a short-term success, look for something that's been failing for 20 years," the futurist said. "If everyone agrees it's a bad idea, do it."

Saffo cited Amazon's Kindle as a good example of this. "We've been failing at ebooks for 20 years," he said. "The Kindle is the 128k Apple of ebooks. It's not the iPod of ebooks. That is coming. ... It might come from Apple. It wouldn't surprise me."

This is an important topic and I find it fascinating given the recent destruction in financial markets. In banking are we going to see companies like Prosper.com taking over when the smoke clears?

Fear, Supersized

Bill Gross caputures current market sentiment (Pimco):

We are to the point of fearing fear itself. America in all its resplendent free market capitalistic glory is on the auction block with few bidders. How this came to be is obvious in retrospect: too much exuberant leverage, not enough regulation; too strong a belief in asset-based prosperity, too little common sense that prices could go down as well as up; excessive “me first” greed, too little concern for the burden of future generations; a political morass unworthy of our Founding Fathers. You may have more to add to the list, but frankly there isn’t enough time. Historians can sit back and reflect, but at this very moment, America is for sale and there is fear and trembling in the auctioneer’s voice.