A call to collect better data in order to predict economic crises

Economist Robert Shiller says that we would be better able to predict economic crises if we only had better data:

Eventually, these advances led to quantitative macroeconomic models with substantial predictive power — and to a better understanding of the economy’s instabilities. It is likely that the “great moderation,” the relative stability of the economy in the years before the recent crisis, owes something to better public policy informed by that data.

Since then, however, there hasn’t been a major revolution in data collection. Notably, the Flow of Funds Accounts have become less valuable. Over the last few decades, financial institutions have taken on systemic risks, using leverage and derivative instruments that don’t show up in these reports.

Some financial economists have begun to suggest the kinds of measurements of leverage and liquidity that should be collected. We need another measurement revolution like that of G.D.P. or flow-of-funds accounting. For example, Markus Brunnermeier of Princeton, Gary Gorton of Yale and Arvind Krishnamurthy of Northwestern are developing what they call “risk topography.” They explain how modern financial theory can guide the collection of new data to provide revealing views of potentially big economic problems.

Even if more data was collected, it would still require interpretation. If we had the right data before the ongoing current economic crisis, I wonder how confident Shiller would be that we would have made the right predictions (50%? 70% 95%?). From the public narrative that has developed, it looks like there was enough evidence that the mortgage industry was doing some interesting things but few people were looking at the data or putting the story together.

And for the future, do we even know what data we might need to be looking at in order to figure out what might go wrong next?

How other states see Illinois’ income tax hike

The news this week that Illinois will have higher personal income and business taxes has spread to nearby states. According to this AP report, “neighboring states” are “gleeful” over this news:

Neighboring states gleefully plotted Wednesday to take advantage of what they consider a major economic blunder and lure business away from Illinois.

“It’s like living next door to `The Simpsons’ — you know, the dysfunctional family down the block,” Indiana Gov. Mitch Daniels said in an interview on Chicago’s WLS-AM.

But economic experts scoffed at images of highways packed with moving vans as businesses leave Illinois. Income taxes are just one piece of the puzzle when businesses decide where to locate or expand, they said, and states should be cooperating instead trying to poach jobs from one another.

“The idea of competing on state tax rates is . . . hopelessly out of date,” said Ed Morrison, economic policy advisor at the Purdue Center for Regional Development. “It demonstrates that political leadership is really out of step with what the global competitive realities are.”

A few thoughts:

1. Mitch Daniels watches The Simpsons? Might this admission hurt his possible presidential run or would it help him sell a hipper image? In the minds of some, perhaps where the analogy breaks down is that the Simpson family always seems to turn out all right in the end.

2. Income taxes are just one factor that businesses consider. I would like to read more about this at some point. For example, the conventional literature on suburban development suggests that low taxes is one of the reasons that residents and businesses decided to move out of the city in the first place. It would be helpful to know what are the “most important” factors that businesses consider – is income tax a lesser factor or a greater factor?

3. How many businesses will actually move to Wisconsin or Indiana or elsewhere and is there a way to predict this? It is true that Americans can vote for certain policies or actions by moving. Taxes may even be part of the reason the Sunbelt has grown in population in recent decades. At the same time, there are other factors beyond taxes that anchor people or businesses to certain places. I was intrigued with this question when living in South Bend, Indiana. Some people said they couldn’t wait to leave. Others wanted to stay. What pushes people (or businesses) to the point where they actually will move? Moving is not an easy process – it requires quite a bit of change and money (though money might be saved in the long run).

3a. The opinion of Wisconsin or Indiana held by Chicago area residents is often not the highest. Are these tax increases enough to push people toward places that they chose not to move to before?

3b. Is this “gleefulness” from other states tied to larger issues other states with the state of Illinois?

Deciding whether to buy or rent

One of the New York Times blogs discusses whether residents should buy or own. The decision could be based on a ratio for metropolitan areas that gives some indication of whether owning or renting is a better choice:

A good rule of thumb is that you should often buy when the ratio is below 15 and rent when the ratio is above 20. If it’s between 15 and 20, lean toward renting — unless you find a home you really like and expect to stay there for many years.

While the metropolitan average is 15.1, 17 metro areas have ratings over 20 (led by East Bay, CA, Honolulu, HI, San Jose, CA, San Francisco, CA, and Seattle) and 14 metro areas have ratings below 15 (with the five lowest being Pittsburgh, PA, Cleveland, OH, Detroit, MI, Phoenix, AZ, and Dallas – Fort Worth, TX).

The blog writer come to this conclusion about the data: “It’s pretty amazing when you think about it. The country has suffered through a terrible crash in home prices, yet buying a house remains an iffy proposition in many markets.”

While this may be true, what is even more remarkable is that homeownership is still such a widespread goal. If this measure is reliable and valid (meaning that it is consistent and it really tells us something about buying vs. owning), then homeownership might never really be about an economic improvement over renting. Rather, Americans have made owning a home an important cultural value and then use economic rationales to justify their decisions.

What exactly is it that appeals to people about owning their home? They get to make their own decisions, they don’t have to pay a landlord or wait for them to take care of repairs, they get some separation from their neighbors, and overall, they feel like they have made it on their own. If renting was a cheaper option but people could still afford to buy a home, how many Americans would decide to rent?

What to do with a sociology PhD: become the father of the hedge fund

A common question arises regarding sociology degrees: what can you do with that? The man behind the hedge fund, Alfred Winslow Jones, held a sociology PhD from Columbia University before going on to becoming a financial writer and inventor:

In fact, by the time the article hit the newsstands, Jones was already well in the process of setting up his own investment firm, A. W. Jones & Co. While reporting on the latest investment strategies, Jones had begun to contemplate a new approach, one that would include selling short some stocks in a portfolio as a way to protect against the market’s uncertainties.

Such a portfolio, Jones would explain to his investors, was a “hedged” fund..

In 1941, Jones received a sociology doctorate from Columbia University. For his research, he interviewed 1,705 residents of Akron, Ohio about their attitudes toward corporations and property. He found that, despite local labor unrest and political tensions, Akron was not divided rigidly along class lines. His dissertation was published as a book titled Life, Liberty, and Property, which became a much-used text in sociology circles…

Landau highlighted Jones as the man who had started this trend, noting however that the sociology Ph.D. “actually seems to be more interested in things other than finance,” including finding self-improvement alternatives to welfare and organizing a Reverse Peace Corps to bring foreigners to work with poor Americans. Jones was quoted complaining that “too many men don’t want to do something after they make money.” Many of Jones’s early investors, Landau wrote, were scholars, social workers and others whom Jones had met over the years and was trying to free from financial concerns.

Sounds like an interesting life. It would be fascinating to hear Jones talk about how his PhD in sociology helped push him toward his financial inventions and actions. Was it something about the way sociology views the world that helped him develop the idea of the “hedged fund”? Perhaps sociology gave him some unique insights into the operation of economic markets. Additionally, it sounds like Jones had some sociological thoughts about what one should do with an accumulated fortune: it should be put toward new social ideas and goals.

Thinking about a culture of homeownership

The recent cover of Time featured a story about homeownership. While the story emphasized the idea that homeownership is not an unquestionable good (particularly economically), it also argued something else: homeownership is an important part of American culture that should be examined.

For generations, Americans believed that owning a home was an axiomatic good. Our political leaders hammered home the point. Franklin Roosevelt held that a country of homeowners was “unconquerable.” Homeownership could even, in the words of George H.W. Bush’s Secretary of Housing and Urban Development (HUD), Jack Kemp, “save babies, save children, save families and save America.” A house with a front lawn and a picket fence wasn’t just a nice place to live or a risk-free investment; it was a way to transform a nation. No wonder leaders of all political stripes wanted to spend more than $100 billion a year on subsidies and tax breaks to encourage people to buy.
With the economic crisis surrounding homes (and the foreclosure issue is going to be around for a while), some are beginning to question the role of housing within the American dream. From the early days of American life, the single-family home was a special place that dovetailed with American emphases on individualism, the nuclear family, and an anti-urban bias.
Of course, this cultural ideal was pushed along and aided by government and economic policies that emphasized homeownership. So, now faced with economic troubles, the country could either support or move away from this value:
1. Support this value by making houses a safer investment and tightening up the mortgage markets so that lenders and borrowers are working together rather than simply trying to profit.
2. Change or work against this value by supporting other kinds of housing tenure, primarily renting. But this could include moves toward more co-operative housing or other options.
Thus far, I would say Option #1 has been chosen: try to shore up the housing market without questioning whether homeownership should be the ideal or if other options are possible.
I’m not suggesting homeownership is necessarily good or bad. What this housing crisis does offer is an opportunity to ask how homeownership fits into our future vision of America.

Decrease in illegal immigration between 2007 and 2009

Based on data from the US Census Bureau, a new report from the Pew Hispanic Center says illegal immigration has recently dropped with a 67% decrease for the years 2007 and 2009 (about 300,000 people a year) compared to the years 2000 to 2005 (about 850,000 people a year).

A Washington Post piece explores the reasons for the decline:

Douglas Massey, a Princeton University sociologist who studies migration, said the recession and lack of jobs are major factors in the decline of those entering the country illegally.

The unemployment rate for unauthorized immigrants is 10.4 percent higher than that of either U.S.-born residents or legal immigrants, the Pew report said.

Massey said other likely reasons for the decline include an increase in law enforcement and deportations, and enactment of stricter legislation against illegal immigrants. He also pointed to more guest-worker spots, from 104,000 in 2000 to 302,000 in 2009 — allowing more immigrants to come to the United States legally.

While these results are open to some interpretation (the article includes several perspectives), the economic situation has to play a big role. For all immigrants, a weaker American economy likely has a big impact on decisions about whether to come to the United States. Without plentiful jobs, the “land of opportunity” has less to offer.

One way to help assess the impact of economics on illegal immigration would be to see whether immigration of all kinds is down over this same time period.

How birth rates can be influenced by economics

Birth rates have been relatively stable over the last 20 years in the United States – while there is some variation, it is nothing like comparing the birth rate today to the birth rate in early 1900s. Additionally, the United States has a relatively high birth rate compared to many industrialized nations.

However, new data suggests the birth rate may have been affected by the economic crisis:

The birth rate, which takes into account changes in the population, fell to 13.5 births for every 1,000 people last year. That’s down from 14.3 in 2007 and way down from 30 in 1909, when it was common for people to have big families…

The situation is a striking turnabout from 2007, when more babies were born in the United States than any other year in the nation’s history. The recession began that fall, dragging stocks, jobs and births down…

Another possible factor in the drop: a decline in immigration to the United States.

On one hand, deciding to have a child is a very personal decision – the United States has no official guidelines about this and people are free to do what they wish. On the other hand, there are a whole host of social factors that influence this decision including economics, cultural background, and social pressure to conform to existing and changing norms.

A few days ago, the Chicago Tribune highlighted the issue in Illinois.

Companies come, companies go: Blockbuster edition

Blockbuster has been on the economic edge for a while now and is apparently close to filing for bankruptcy.

Perhaps Blockbuster is a microcosm of the economic situation in America over the last 25 years: it quickly grew in size to fill a market niche, expanded to what too turned out to be too many locations, and then eventually has reached a point where it needs to seriously regroup due to technological change and some other reasons. I remember seeing them sprout in the Chicago area. Within a few years, we went from no nearby stores to numerous locations within 5 miles (and even more of its type if we were to count businesses like Hollywood Video). They were everywhere, including suburban downtown locations and strip malls.

I would be interested in reading a sociological study about how this company expanded but then had trouble adapting to the changing market for movies and video games. How did they successfully find customers early on and then lose those customers later on? How did Blockbuster’s growth accompany general suburban growth, housing patterns, and growth of other important retailers?

Thinking about economics: science or ideology?

Barbara Kiviat discusses whether economics is a science or an ideology. Part of her conclusion:

And when you think about it, it is a little odd that we think economics would be able to do these things. After all, the economy is as much a product of sociology and policy as it is pure-form economics. Yet we’d not expect a sociologist or a political scientist to be able to write a computer model to accurately capture system-wide decision-making. The conclusion I’ve come to: while economists may have an important perspective on whether it’s time for stimulus or austerity, maybe we should stop looking to them as if they are people who are in the ultimate position to know.

Sociologists have been arguing for some time now that sociology has a lot to say about economics, including about how cultural values and ideology guide economic decision-making and actions.