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Home Publications Blogs Beat the Press Larry Summers Says that Reinhart-Rogoff Type Mistakes Are "Distressingly Common" Then Goes on to Prove His Point

Larry Summers Says that Reinhart-Rogoff Type Mistakes Are "Distressingly Common" Then Goes on to Prove His Point

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Monday, 06 May 2013 07:09

Larry Summers weighed in on the famous Reinhart-Rogoff Excel spreadsheet error in a Washington Post column this morning. His first big lesson from the debate is:

"Anyone close to the process of economic research will recognize that data errors like the ones they made are distressingly common."

Summers immediately demonstrates the truth of this assertion as he tries to make a second point about inferring the future based on statistical regularities from the past.

"Trillions of dollars have been lost and millions of people have become unemployed because the lesson learned from 60 years of experience between 1945 and 2005 was that 'American house prices in aggregate always go up.' This was no data problem or misanalysis. It was a data regularity until it wasn’t. The extrapolation from past experience to future outlook is always deeply problematic and needs to be done with great care."

The problem with Summers story is that American house prices in aggregate did not always go up. In fact, for the century from 1896 to 1996 they just kept pace with the overall rate of inflation. Here's the story using government data from 1953. (Robert Shiller constructed a series going back to 1896 from a variety of data sources.)

sales-prices-v-rents

Source: Bureau of Labor Statistics, Federal Housing Finance Authority, and Author's calculations.

It was easy to see that house prices, adjusted for inflation, did not have a clear upward trend until the bubble started to propel prices upward in the late 1990s (yes, coinciding with the stock bubble, just like Japan). For some reason Larry Summers chose not to notice the data right in front of his eyes both at the time and apparently even to this day. (What is it about Harvard economists and data?) So yes, the tendency for economists to misread data is distressingly common and will probably continue to be as long as economists who make such errors face no consequence in terms of their career or public standing. (At least, this is what economic theory would predict.)

While it is tempting to end on this note, it is important to take issue with Summers' lesson #3:

"Third, while Reinhart and Rogoff’s work was shown not to support the claims made by prominent right-leaning U.S. and British figures regarding the urgency of deficit-reduction efforts, much of the joy taken on the left in their embarrassment is inappropriate. It is absurd to blame them for austerity policies. The authors of those policies chose the policies first and then cast about for intellectual ballast. While there may be no threshold beyond which debt becomes catastrophic, and while the British and American experiences both suggest that fiscal contraction in a slack economy where interest rates are near zero is inimical to growth, it is a grave mistake to suppose that debt can or should be accumulated with abandon."

It's nice of Professor Summers to offer this lecture to the left. (Maybe he'll offer an expanded version in a MOOC.) I suspect that just about everyone on the left knows that the politicians pushing austerity couldn't care less about Reinhart and Rogoff's arguments. However, their work was very valuable in providing intellectual cover. It is much easier for politicians to say that they are cutting programs like Social Security and throwing people out of work because they fear an economic crisis than to say they are doing it just to ensure that corporate profits stay high and rich people don't have to pay higher taxes. For this reason, Reinhart and Rogoff's work was very important for the austerity policies that have been implemented in much of the world.

As far as his point that, "it is a grave mistake to suppose that debt can or should be accumulated with abandon," it would be interesting to know who he thinks he is arguing with. The vast majority of the left have argued that we need not worry about deficits now. There are few, if any, economists on the left or elsewhere who say that debt levels or deficits would never be a problem. So, let's give Professor Summers a big victory over his straw man opponent!

Comments (44)Add Comment
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written by Bloix, May 06, 2013 8:58
"for the century from 1896 to 1996 they just kept pace with the overall rate of inflation."

This is true but misleading. The modern home mortgage took off after WWII. Once a buyer could purchase a house with, say, 20% down, he or she could experience the dizzy profitability of leverage with virtually no downside risk. It was and still is the only investment that most people ever make with borrowed money. As long as houses could be depended on to appreciate in at least nominal terms over a period of years, buying a home was the best investment available to the ordinary American. At worst it was a hedge against inflation plus a forced savings plan coupled with a tax break; and more often, it was genuinely a profitable investment.

One way to think about the housing bubble is that Wall Street looked around and saw that ordinary people were making profits and said to itself, we can't have that, profits in investments belong to us.
Housing as investment
written by Dennis, May 06, 2013 9:00
@skeptonimist, a house is not a good investment unless its real price increases. If it stays the same, you will have earned less than nothing because of the relative maintenance cost of ownership compared to renting, and because of the fixed costs associated with buying/selling property (agent fees, transfer taxes, misc. closing costs.)
buying a house is a hedge...
written by pete, May 06, 2013 9:25
As Dean points out, rents rise generally with the rate of inflation. However, this is not dispersed equally across regions. In California, rents were soaring in the dotcom era, much faster than inflation, so it was an easy calculus to hedge those rises by purchasing a home, under the assumption that California would continue to boom. Most interesting is the recent research that all the bankers and mortgage originators themselves were leveraging up into housing during the mid 2000s. I guess only Dean and Bob Shiller were selling short. Those with sufficient income, while perhaps "underwater" now, will likely have positive equity in 3 to 4 years, except for the few who bought at the absolute peak.
It's Nice to See Summers is Consistent
written by Ken Houghton, May 06, 2013 9:29
Robo-Economist--the man who led a faculty that includes Amy Finkelstein and still managed to say that women just don't have aptitude for science--now desperately attempts to defend his "researchers" who made Econ 301 mistakes and (instead of fixing their work) spoke frequently and publicly about what their "work" showed.

When is the economics profession going to admit that Summers is a breeding experiment that worked about as well as his nicknamesake?
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written by fuller schmidt, May 06, 2013 10:22
That Summers is as prominent as he is and would write that makes reality seem completely farcical. At least Samuelson just seems like a monkey with a typewriter.
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written by liberal, May 06, 2013 10:28
This discussion is confused because it misses the point: a house might not be a good investment, since it is capital which depreciates, but the land under the house is often a great investment.

Furthermore, the claim that housing (and implicitly the land underneath the house) appreciates only with inflation isn't really believable. Since GDP rises faster than inflation (at least here in the US!), the claim that a particular parcel of land appreciates only as fast as inflation would imply that its value decreases when measured against the overall economy.

This is difficult to believe. Unless rents aren't maintained in already-existing urban areas because of massive buildouts into farmland, the rent commanded by "valuable" land should increase in tandem with wages and business incomes.

It's not clear to me that the "appreciates with inflation" claim is truly longitudinal, which is the value we're interested in when asking whether a parcel is a good investment.

The house I'm sitting in was built in 1948 in a suburb of DC. Considering what we paid for it, it's very hard to believe the price only kept up with inflation.
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written by liberal, May 06, 2013 10:33
Dennis wrote,
If it stays the same, you will have earned less than nothing because of the relative maintenance cost of ownership compared to renting...


Yes, having rented most my life and owning now, maintenance is definitely something renters don't have to deal with.

OTOH, when I see other single family detached homes for rent, the price seems to be what the owner would probably be paying on his mortgage. That means the renter is paying the owner's principle, not just interest. That makes renting seem like a bad deal in the SFH market.
Summer never said that
written by anon, May 06, 2013 10:36
I don't like Summers either, but he never said "that women just don't have aptitude for science". Please read the transcript before making such statements.
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written by Bloix, May 06, 2013 10:56
To get back to Dean's point - I read Summers this morning in the Post and I thought it was appalling:

"Rogoff and Reinhart are rightly regarded as careful, honest scholars. Anyone close to the process of economic research will recognize that data errors like the ones they made are distressingly common."

WTF?
the role of intellectuals
written by Jennifer, May 06, 2013 11:34
As many people have commented on, you have to wonder what gets you kicked out of Harvard-obviously it's not publishing disinformation. Summers and R and R just demonstrate what their role is, simply to assist the ruling class in whatever they want.
What about MMT?
written by pjm, May 06, 2013 11:41
(this is in regards to Summer's straw man)
Dean, I am asking because I am curious (and don't have a stake in the answer either way). From what I've read, MMT people claim that they really don't theorize that "debt doesn't matter". However, even Krugman seems to criticize them as though they do? Any perspective on this would be interesing.
Disingenuous
written by Pinkybum, May 06, 2013 11:52
Professor Summers is being extremely disingenuous here. He talks as if Kenneth Rogoff was an innocent bystander who made a bit of a booboo on some obscure piece of academic research - when we absolutely know this is not the case. Reinhart-Rogoff was a critical piece of research the results of which were cited time and time again by politicians and pundits about the perils of excessive government debt above 90 percent of GDP. Not only was there a sustained propaganda campaign concerning the 90 percent figure but Kenneth Rogoff himself testified in front of congress about the perils of government debt and how it should be cut sooner rather than later. This conclusion flies in the face of Summers own research conducted with Brad Delong "Fiscal Policy in a Depressed Economy" which shows that austerity even in purely fiscal terms is most probably self-defeating in the long run because of the contractionary effects.
PJM, most MMT economists understand that debt matters
written by Charles, May 06, 2013 12:14
People who are not economists who read MMT economists misunderstand and think that the government can just decide to create money indefinitely. If all the players are willing to go along, as happened in the US in WWII and as seems to be happening in Japan now, sure.

But the MMT economists are careless in how they talk. For example, Bill Mitchell says:

The only issues a progressive person might have with public debt would be the equity considerations of who owns the debt and whether there an equitable provision of private wealth coming from the deficits. ... there is no reason to obsess over the level of outstanding public debt. The government can always honor its debt; it can never go bankrupt. There’s no question that the debt obligations will be met. There’s no risk. ...


This sounds very much like debt doesn't matter. But then he goes on to say

None of this is to say that budget deficits don’t matter at all. The fundamental point that the original developers of MMT would make—myself or Randall Wray or Warren Mosler— is that the risk of budget deficits is not insolvency but inflation. In saying that, however, we would also stress that inflation is the risk of any kind of overspending, whether investment, consumption, export, or government spending.


So, in an afterthought, he acknowledges what he should be saying up front. He also should be saying that deficits can lead to a decline in a currency. That matters if you want to import stuff. In our case, we import everything from tomatoes to oil. So if paying more for eating and driving is an acceptable tradeoff for, say, spending more on medical care, ok. But as the most lightly taxed of the industrialized nations, why not just pay for our spending as we go?

MMT, in my opinion, is sanctifying deficits because they don't see the need to solve the real problem: reactionaries wasting money on things the country does need. They should consider that in so doing, they are joining Dick Cheney.
Sorry, link for above
written by Charles, May 06, 2013 12:23
The link for the above article is Harvard International Review http://hir.harvard.edu/debt-de...ary-theory
Known Unknown Data, Unknown Known Data ... Who Could Have Known?
written by Last Mover, May 06, 2013 12:40
The chart on house sale prices versus rent prices is damning alone. If ever there was a sacred axiom in economics it's where present value of the asset in question is assumed to be represented with a periodic rental payment identical to the present value of comparable payment implied or explicit, to own rather than rent.

Stated differently, how can the purchase price be so much higher than the rental price in the same market? Why weren't owners commanding rent prices comparable to purchase prices? Why didn't competition drive down purchase prices to equal rental prices or drive rent prices up to purchase prices?

The axiom was violated. The only explanation was a bubble that rewarded only owners by virture of ownership and resell itself, not for the use value of renting the asset.

But Larry Summers of the hi-math-finance economics club dismissed it (along with R-R) as something highly problematic associated with extrapolating the future from patterns of the past, certainly not a problem with the data itself?

Ok. So there's nothing wrong with the data but there's something wrong with using it for prediction, which means the data is useless like a Rumsfeld Paradox.

When proclaiming "who could have known" excuses it doesn't get any better than this.
House as investment? Goody idea!!
written by Squeezed turnip, May 06, 2013 1:02
For most people, purchasing a home (primary residence) is not and should not be considered an investment, at least not in the financial sense, for more reasons than I have time to go into. In any event, a home is not capital (unless you're a closet Marxist): primary residences do not produce goods and/or services.

And, pete, I'm putting a note in my calendar 4 years from now to check on how purchasers around 2000 fared on their "investment." That's an interesting forecast, considering the fact that the economy won't fully recover for another 10-20 years, at the current rate.
Deficits don't matter
written by BobK, May 06, 2013 1:45
As far as his point that, "it is a grave mistake to suppose that debt can or should be accumulated with abandon," it would be interesting to know who he thinks he is arguing with.

I can only assume that Summers is arguing with Dick Cheney. :-)
reflections
written by Eclectic Obsvr, May 06, 2013 1:54
While I agree with the factual aspects of the blogpost here, I think you're being a little harsh on Summers. While I'm sure he's being soft on R-R, because their defense of their work has been at best dyslectic, I think he's trying to make a point about being cautious about using some econ paper or research for policy purposes. Technically, you are correct about housing but his point was more about not expecting quite so severe a bust -- though I seem to think that at least regionally we've had some of those before. Remember he's doing this in an opinion piece for WAPO and not in an Econ blog. We should be happy anytime WAPO moves to the side of common sense for their Econ pieces.
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written by liberal, May 06, 2013 2:11
Squeezed turnip wrote,
For most people, purchasing a home (primary residence) is not and should not be considered an investment, at least not in the financial sense, for more reasons than I have time to go into.


Well, those reasons are wrong, insofar as a home is one of the main investments most will make in their lifetime.

In any event, a home is not capital (unless you're a closet Marxist): primary residences do not produce goods and/or services.


That's just silly.

The question is, does a house "produce" anything? Of course it does. It produces shelter, which is of considerable economic value.

The next question is, what class of productive factor is a house? Well, the house itself is clearly capital; it's not land or labor. And it behaves like most capital, e.g. it depreciates over time.

Though a home is more than a house; it includes the land the house sits on. Land is obviously of the productive factor "land".
The great majority of Economists are water carrying shills, nothing more.
written by bailey, May 06, 2013 2:23
Economists should be required to support every term they rely upon to support their absurd arguments with statistically significant population samplings. Inflation? They should be embarrassed!
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written by liberal, May 06, 2013 2:29
Eclectic Obsvr wrote,
...but his point was more about not expecting quite so severe a bust...


I might be wrong, but I thought Dean made reasonable projections as to how bad the bust would be, using a simple back-of-the-envelope calculation based on the hit taken to aggregate demand.
Last Mover ignoring cap gains....
written by pete, May 06, 2013 4:17
The price of the home refelcts expected capital gains on the home in addition to the implicit rental. The rental market reflects current "equilibrium" related to local income and supply. Thus, the rent could be far lower than the cost of the mortgage and taxes, if the owner expects a capital gain on the property.
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written by Bloix, May 06, 2013 4:43
And this seems right to me:

"In any real scientific field, which apparently doesn’t include economics according to Summers’ interpretation of how acceptable scholarship is performed, research is never taken seriously until methodology and data is published...

"In science anyone making bold claims, but refusing to release their research data, should always be treated as a charlatan until proven otherwise."

http://fdlaction.firedoglake.com/2013/05/06/the-real-rogoff-reinhart-problem-was-not-the-mistakes-it-was-the-lack-of-basic-transparency/
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written by Deb Schultz, May 06, 2013 4:49
If such major errors are so distressingly common, why don't more economics professors try to replicate the results of their fellow professors' data analyses rather than wait for some graduate student to do it? And surely they should try to double check such 'important' studies as R and R's before they start using them as givens in or bases for their own positions on policy.
Investment, or not?
written by Squeezed turnip, May 06, 2013 5:35
From Samuelson and Nordhaus' text: "A capital good (sometimes simply capital in economics) is a durable good that is used in production of goods or services." Primary residences are bought for personal use; as such, they are durable consumer goods. A developer invests in a house; the homeowner consumes that house. The attitude that purchase of a primary residence is a financial investment was in big part the 'bright idea' that inflated the housing bubble. At best, purchase can be considered as a hedge against rent inflation. As far as land being productive, sure, I know farmers and ranchers myself. But the typical homeowner is not typically using their land to produce a cash crop. The average homeowner's land is not being used as real capital.

Cars aren't investments either. They are durable consumer goods.
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written by liberal, May 06, 2013 7:52
Squeezed turnip wrote,
Primary residences are bought for personal use; as such, they are durable consumer goods.


More silliness. If a home doesn't produce anything of value, then why do people have to pay rent for a home they don't own?

The attitude that purchase of a primary residence is a financial investment was in big part the 'bright idea' that inflated the housing bubble.


No it's not. There are all sorts of financial investments that are bad to make; that doesn't mean they're not investments.

As far as land being productive, sure, I know farmers and ranchers myself.


LOL! That just shows you're so ignorant of land economics as to assume that the only rent-producing land is agricultural.

Please stop; you're making an embarassment of yourself.

But the typical homeowner is not typically using their land to produce a cash crop.


Nor is a business sitting on valuable commercial land. But somehow they're willing to pay sizeable rents for it, usually far in excess that paid for agricultural land. I wonder why that is?

The average homeowner's land is not being used as real capital.


Of course not, since the land isn't capital to begin with. But since your understanding of anything related to economics is severely underdeveloped, there's clearly no hope in your understanding the difference between land and capital.
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written by liberal, May 06, 2013 8:06
pete wrote,
The price of the home refelcts expected capital gains on the home in addition to the implicit rental.


Agree, though more precisely it's the land (site value) that appreciates. Houses deteriorate and in almost all cases depreciate with time (barring improvements like additions).
Your home is not an investment
written by Squeezed turnip, May 06, 2013 10:20
Fine liberal, don't believe me. Call me names, insinuate I'm an ignoramus. But you're still ignoring the fact that in reality, for us hands in the dirt people, a home is not an investment. Robert Shiller agrees with me (http://www.businessinsider.com...fad-2013-2, not that he's the end-all-be-all authority but he's certainly more learned than you.

Now, if your primary concern for an investment is getting a decent return at low risk, would you rather get an at best 4% return on your investment (according to Pete, and that's not taking out costs) when there are better returns in corporate bonds or in index funds?

As far as land rents, i am talking about capital as a means of production, not rents (as you stubbornly and disingenuously ignore). And that is why a primary residence is not an investment. If you want to continue to fuel the fantasy for yet another housing bubble or for the fleecing of low-income home buyers, feel free to continue to do so. But I'm not going to sit idly by and let you help sell the biggest piece of stinking manure down the pike since the flow that begin in 1980 with the Reagan crowd. At best, homeownership might be an inflation hedge. That's it. Don't try to sell a turnip as a steak.
Rental Rate, Sales Price, Capital Gain, Durable Good, Land Rent
written by Last Mover, May 06, 2013 10:47
@pete, liberal

Most housing as normally defined qualifies as end use durable consumption goods. Houses are not investment goods because investment goods are used to produce other goods and services. Renting a house or apartment on a normal short term basis is not consumption of a (that particular) durable good like owning it would be.

The price of the home refelcts expected capital gains on the home in addition to the implicit rental. The rental market reflects current "equilibrium" related to local income and supply. Thus, the rent could be far lower than the cost of the mortgage and taxes, if the owner expects a capital gain on the property.


The essential point of the chart is that higher expected capital gains were driven by the bubble that forced sales price to diverge upwards from rental price.

Rental market prices were not independently set by "local income and supply", immune from the increase in capital gains. Far from it, the housing bubble spurred a huge increase in the oversupplied quantity of housing that drove up the rental vacancy rate at the same time it drove up the sales price through the expected capital gains rate.

That's why rental rates did not follow the sales price rate upward, because the glut of unoccupied housing kept it down. Normally such a glut of housing would drive down the sales price to track the rental rate as before, or with sufficient demand the rental rate would rise to track the sale price rate had the vacancy rate remained stable on trend absent a bubble.

But the bubble pushed the sales price and vacancy rate in the opposite direction of trend. At one point in the face of this data Dean Baker even held a contest for the best explanation of why there wasn't a bubble and published the winning essay.

As for land rent (economic rent in the sales price that does not produce more housing nor higher quality of housing), note technically that land rent is not necessarily related to the bubble component of capital gains and the sales price except perhaps in a leverage sense.

A sales price made large by an already large component of land rent would obviously increase the magnitude of a subsequent price increase driven by the bubble in absolute terms. But in terms of land rent itself reflecting fixed scarcity of land, that's already there, bubble or no bubble. If anything the glut of housing exerted a downward pull on the influence of the land rent component in sales price, but was swamped by the bubble itself in the opposite direction.
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written by Peter Thom, May 07, 2013 7:02
Though Summers is wrong about a 60 year duration of rising housing prices, a 30 year basis of rising prices in coastal cities actually occurred from about 1975 to 2005. Baby Boomers, who came of age during this period did learn the (false) lesson that housing prices always rise. And those who exited when the handwriting was on the wall in the early 2000s cashed in, often handsomely. In any case the housing downturn was only a catalyst for the real cause of the financial crash, the multiple tranches of mortgage-backed derivatives the shadow banking system created on top of a flimsy sub-prime market. Those derivatives dwarfed the entire residential mortgage market by a factor of five, and the sub-prime market by a factor of at least 50. Summers' general point that extrapolation of past data to future behavior can be "deeply problematic" remains valid within the 30 year time horizon of rising housing prices. But the actors that used that lesson to destroy the financial system were those who abused derivatives; and Summers was instrumental in denying the application of regulations that may have prevented the misuse of those derivatives.
Slight correction for one of the graphic data sources ...
written by David, May 07, 2013 8:31
It's the Federal Housing Finance Agency (not FHF Authority).

it seems unlikely that sales prices for residential homes could exceed inflation for an extended period of time, at least in this age of wage stagnation.
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written by liberal, May 07, 2013 9:54
wrote,
As far as land rents, i am talking about capital as a means of production, not rents (as you stubbornly and disingenuously ignore).


More astounding public embarassment.

There are, classically, three factors of production: labor, capital, and land.

Labor: income is "wages"
Capital: income is "profits" or "interest"
Land: income is "rents"

Why are you commenting on an economics blog if you don't understand the distinction between "rents" as used colloquially and "rents" as used in economics?
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written by liberal, May 07, 2013 10:00
Last Mover wrote,
Renting a house or apartment on a normal short term basis is not consumption of a (that particular) durable good like owning it would be.


Frankly, that's silly. The only generic difference in an economic sense between someone owning a house and someone renting a house is that in the case of ownership, the owner is paying the rent to himself.

There might be differences for the sake of public policy, e.g. oft-repeated claims that home ownership leads to greater care of the house, etc. But the notion that renting from someone else vs owning the house yourself should lead to an important distinction on how we classify a structure (capital vs not) is bizarre.
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written by liberal, May 07, 2013 10:05
Last Mover wrote,
As for land rent (economic rent in the sales price that does not produce more housing nor higher quality of housing), note technically that land rent is not necessarily related to the bubble component of capital gains and the sales price except perhaps in a leverage sense.


That's reasonable, but note that there's still a connection between land rent and the bubble. ISTM that it's easier for bubbles to occur in assets that generate scarcity rent, because a great way to get money for nothing is to own a rent-producing asset purchased at a reasonable price.
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written by liberal, May 07, 2013 10:16
Squeezed turnip wrote,
But I'm not going to sit idly by and let you help sell the biggest piece of stinking manure down the pike since the flow that begin in 1980 with the Reagan crowd. At best, homeownership might be an inflation hedge. That's it. Don't try to sell a turnip as a steak.


You miss the point entirely, since you don't understand the economics of rent.

I'm by no means saying that a primary residence is always a good investment. In many situations, it's a poor investment (as during the bubble---I myself sat out the market then).

But the fact is that land rent is accrued by a landowner for doing absolutely nothing. In our current system, if you don't own land, you pay that rent to someone else.

One way to try to get out of that trap, of course, is to own your own land. If you buy at too high a price, it's not going to help you down the road. And if you're not capable of paying cash or financing the loan, you're only going to damage yourself.

As far as normative public policy is concerned, a much better solution than everyone either getting screwed by paying money to someone for value that someone didn't create would be to tax land heavily on an ad valorem basis. The increased revenue could be used to decrease other taxes. That way, money paid to a landowner by a renter would pass through to the state, which itself creates much of the value of land, or can act on behalf of those who do.

But don't pretend that land isn't an investment. While nothing is guaranteed (e.g., if your land, no matter how much site value it originally had, is discovered to lie next to a newly discovered Superfund site, you're screwed), land (particularly well-situated urban land with good site value) is often a very, very good investment.

Countless people become quite wealthy by purchasing residential or commercial sites and eventually selling for a considerable "capital" gain.

Does that mean your average Joe Shmo can do this? No. Does that mean it's just? No.

Robert Shiller agrees with me ...


While he clearly has some understanding of bubble psychology, I don't see any evidence Shiller understands land economics. Dean doesn't seem to, either; most economics don't, ever since the field was bastardized by John Bates Clark (who essentially erased the distinction between land and capital, because otherwise too many people would figure out that landowners get money for doing nothing). Shiller has the additional demerit, however, of being fond of "big finance"---AFAICT he's made multiple claims in recent years that we can fix markets by creating appropriate derivatives markets. If that's not a red flag, I don't know what is.
...
written by liberal, May 07, 2013 10:21
David wrote,
it seems unlikely that sales prices for residential homes could exceed inflation for an extended period of time, at least in this age of wage stagnation.


That is certainly true, though large-scale immigration could increase land rent.
...
written by liberal, May 07, 2013 10:28
Apropos my comment above about the connection between bubbles and rent-producing assets, this guy http://www.shepheard-walwyn.co...Bookid=120 predicted the bubble well in advance of anyone else, even Dean (Dean otherwise was one of the earliest).
...
written by skeptonomist, May 07, 2013 10:34
To be a hedge against inflation, real property does not need to accrue actual rent or serve as capital. Both a dwelling and the land are stores of value, and apart from bubbles, prices have in fact kept up with inflation and there is no reason to assume that they will not do so in the future. Land values may go up on average, since they aren't making any more, while dwellings tend to depreciate.

The average inflation rate since 1934 is over 3.7% while the average 30-year mortgage is now 3.6%. House prices are now back to long-term trend level. At these rates you are basically converting mortgage payments directly into equity. Comparing owning with renting is then a matter of the other expenses - maintenance, taxes, deterioration of the house, etc. These things go into rent also. Unless you own a home outright or you live in a tent you will be making either rent or mortgage payments so it is worth considering whether that money will pay off in the long run. For a number of reasons buying a home is usually a good idea, but obviously not when there is a house-price bubble. The more inflation you think there will be in the future, the more reason to consider a house as an investment. It would be foolish to assume that the current inflation rate will hold forever.
Debt is unnecessary; deficit is necessary. Understand?
written by Rodger Malcolm Mitchell, May 07, 2013 2:18
The U.S. federal government is Monetarily Sovereign. The U.S. dollar arbitrarily was created by federal law, and the government has the legal right to do anything it wishes with its arbitrary creation.

In past years, the government had decided to link the dollar to gold. President Nixon, speaking for the government, simply unlinked it. Done.

The U.S. government has the power to pay any invoice denominated in dollars. If you were to send a $999 trillion invoice to the federal government, the Treasury could pay it in an instant. No taxes; no borrowing; no problem. The government is sovereign over its own creation.

Want to pay off China? Again, no problem. Simply debit China’s T-security account at the Federal Reserve Bank and credit China’s checking account, also at the FRB. Easy. No new money needed.

In short, our Monetarily Sovereign government doesn't need to ask anyone for dollars, not you, not me, not China. The debt is a relic of gold standard days -- completely unnecessary.

But deficit spending is absolutely necessary to grow the economy.
The bottom 90% should not consider homes or land as investments
written by Squeezed turnip, May 07, 2013 3:16
Does that mean your average Joe Shmo can do this? No.


Exactly. You should be totally on board with keeping realtors from telling the average Joe Shmo that their purchase is an investment. I'm not saying that buying a house can't be an investment (see Last Mover's point), but buying a home is not.

Look, the highway to hell is paved with the best of intentions, liberal, but if you're going to educate people about the importance of land rents, you should reconsider your approach. As far as your ideas helping out the under-represented low income people, as far as I can see you're just encouraging a mind frame that will lead to even more exploitation, no matter how technical you make it. I would love for people to own their own house on their own little bit of land, if that's their dream, instead of a mobile home in a trailer park. I don't see how telling them that their home is an investment (like the banks and mortgage originators and realtors did back in the 90's and early oughts), and a pretty poor investment at that, is going to help them raise their living standard. But I do think they deserve protection from rent inflation, especially in the face of wage stagnation over the past 40 years. So, yes, buy a home to live in, it's useful to get where you want to go financially, like a car. But it should not be considered an investment, in the vernacular sense of the word.

In closing, please do point me to the right places to learn about land rents ( it should tell you something if Shiller and Baker don't give it the props you feel it deserves: either it isn't all that important OR it has been communicated horribly (happens in sciences all the time)).

...
written by liberal, May 07, 2013 3:39
Squeezed turnip wrote,

But it should not be considered an investment, in the vernacular sense of the word.


When I say I think it should be considered an investment, that doesn't mean that I think that's a good thing, as in "buy a home! buy a home! it's a great investment!"

Rather, it's that it's such an important decision, financially, that it needs to be viewed as an investment, in all the best and worst senses of the word.

...please do point me to the right places to learn about land rents...


Google "Henry George".

For good polemic, see poster royls@telus.net in the USENET group sci.econ, e.g.
https://groups.google.com/group/sci.econ/search?group=sci.econ&q=author:royls@telus.net+rent&qt_g=Search+this+group

Wikipedia articles on e.g. "economic rent"

Note that these ideas are pretty old, but the theoretical foundation was laid by Ricardo with his theory of rent. The strongest advocate for the normative claim that land rents (when captured by landowners) are ill-gotten gains was best promulgated by Henry George.

NB: land rent is probably about 10--20% of the economy.

...
written by liberal, May 07, 2013 3:44
skeptonomist wrote,
Land values may go up on average, since they aren't making any more, while dwellings tend to depreciate.


Exactly.
...
written by liberal, May 07, 2013 3:57
skeptonomist wrote,
At these rates you are basically converting mortgage payments directly into equity.


Yes, but one big problem is that when rates eventually rise, as they sometime will, prices will come down.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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