Pur Autre Vie

I'm not wrong, I'm just an asshole

Monday, August 31, 2009

Stoat With Your Feet

Grobstein is apparently my only source of ideas these days, as one of his links has led me to this post by Ilya Somin on "voting with your feet." The post irritated me enough to provoke this post, but then defused my anger toward the end by acknowledging the obvious point that "voting with your feet" impedes redistribution. Too late, though - I'm geared up to write a post on redistribution and geography.

Somin claims that "voting with your feet" benefits poor people more than rich people. Somin bases this claim on two assertions: 1) it is easier for poor people to move because they have fewer possessions; and 2) it was helpful for southern blacks to have the ability to move out of the South.

I'm a little unclear on what point #2 has to do with the thesis. Point #1 seems relatively weak to me compared to the distributional impact of mobility. I may have blogged about this before - it's a hobbyhorse of mine - but anyway here goes.

Actually, too tired to write the whole post now. So a quick motivating observation, and then I'll finish the thought in my next post.

St. Louis and Baltimore are both characterized by high levels of violent crime, bad schools, etc. Hopefully I won't get any argument when I claim that they are both poor and dangerous relative to other American cities. For instance, they are second and third in murders and non-negligent manslaughters per capita (behind Detroit, which is in Wayne County but which has its own problems). Data here.

They are also independent cities - neither is within a county. Baltimore County and St. Louis County exist, but the cities seceded long ago (Baltimore in 1851 and St. Louis in 1876, if Wikipedia is to be believed). Outside of Virginia, which is idiosyncratic, there are very few independent cities in the United States (but not too much should be made of this, because quite a few cities, while not technically independent, are coterminous with their counties).

I will claim that none of this is coincidence - the poverty, the status as independent cities, the time period during which the cities seceded from their counties. This is all tightly bound up with "voting with your feet," and it throws considerable doubt on the thesis that this phenomenon has been a boon to poor people. But it will have to wait for my next post.

Saturday, August 29, 2009

Kidneys and Vietnam

Grobstein links to this post by Bryan Caplan, who asks why people oppose markets in organs.

I find this kind of stuff obnoxious, but let me take a stab at explaining opposition (a better stab, I hope, than the one Will Wilkinson proposes but does not endorse).

The big tradeoff of a free-market system, I think, is that it greatly increases efficiency (by one particular not-uncontroversial measure) and also puts in place a system that to some extent benefits the rich at the expense of the poor. I believe we should attempt to limit the scope of the market to those areas where we think this tradeoff is worthwhile.

So here's an overwrought hypothetical that I've thought about a bit. It's 1975, and U.S. helicopters are evacuating as many people from Saigon as they can before the Communists arrive. But how should they allocate space on those helicopters? Not everyone who wants to escape can be accommodated.

The obvious answer, to a free marketer, is to sell spaces on the departing helicopters. This has all kinds of pro-efficiency consequences, including providing an incentive for Vietnamese people to work hard and providing an incentive for entrepreneurs to start helicopter-evacuation businesses. Additionally, the revenue could be used to offset income taxes in the United States, which will reduce the deadweight loss associated with all (non-Pigovian) taxes. And of course, willingness to pay just is the way we should allocate resources, under a Pareto-optimizing system (or Kaldor-Hicks or whatever, same idea).

So imagine two men who have worked with the Americans in Saigon and who will definitely be executed if captured by the Communists. The idea here is that one of them will put a higher value on his life than the other, and will pay more to escape. By holding a properly designed auction, we can determine which of these men puts a higher value on his own life, and then rescue that man instead of the other.

And, the free marketer might argue, we can't be sure the richer man will win the auction. Perhaps the poor man is younger, or has a big family, or is just idiosyncratically attached to life. Then he might outbid the richer man, especially if there is a free market in organs or children or something so that he can juice up his bid.

But I suspect that in most circumstances the rich man will win the auction regardless. Willingness to pay, here, doesn't measure much more than total wealth. None of the people crowding the Saigon rooftops was merely casually interested in a helicopter ride out of Vietnam. No one is going to be outbid because of anything other than relative poverty.

So then the question is, what are we trying to maximize? And admittedly there is no good answer. We tend to allocate organs based on things like likelihood of success. So you don't give a kidney to someone whose body is very likely to reject it, and you don't give a liver to someone who continues to drink heavily, regardless of how much those would-be recipients are willing to pay to jump in front of the people ahead of them on the list. We don't let people buy (human) kidneys just to fry them up and eat them, even though I don't see why that would be impermissible in a free-market system.

And yes, the status quo tends to be bureaucratic and human and therefore imperfect and arbitrary. It requires medical professionals to make judgments that we are uncomfortable authorizing anyone to make. I mean, how did the Americans determine which Vietnamese to rescue in Saigon? There's just no good answer. But there are plenty of bad answers, and one of them is to enact a free market in organs.

Thursday, August 27, 2009

Risky and Calculating

So over the last few years I have become a fairly regular reader of Calculated Risk. It's a blog devoted mostly to economics and housing, with a focus on clear presentation of data. At some point, a commenter with the handle "Tanta" was invited to write regular posts, which she did until her death in the autumn of 2008 (I still think of her as Tanta, though it has been revealed that her name was Doris Dungey). Tanta spent most of her career in the mortgage industry and wrote most of her posts about the intricacies of mortgages and related public policy. Many of her posts are compiled here and here.

Anyway, everything I know about mortgages I learned from Tanta, and I thought I would use that knowledge to critique this piece in the New York Times, which was actually linked from Calculated Risk.

The Times seems to have engaged in its incredibly obnoxious habit of changing the headline on an online article. I believe the headline was originally "Adjustable Mortgages Loom as Threat to Housing Recovery" (which is the text under which Calculated Risk linked to it). Now the headline reads "Loans That Looked Easy Pose Threat to Recovery."

The article, under its original headline, caught my eye because adjustable-rate mortgages (ARMs) should not be a problem right now per se. The whole point of ARMs is that the interest rate adjusts as a function of some benchmark, and interest rates generally are extremely low right now. I read the article because I was interested to see why ARMs would be a problem - perhaps because rates will inevitably rise when the recession ends?

But no, it turns out that we're not talking about ARMs generally, but rather "option ARMs." What is optional about an option ARM is amortization - the borrower chooses whether to make the full amortizing payment, to pay interest only, or to pay some specified lesser amount. If the borrower pays less than the interest, then the unpaid interest is added to the principal amount of the loan. After a certain amount of time, or after the principal balance grows to a certain level, the borrower is required to make fully amortizing payments.

Many borrowers used option ARMs as an "affordability product," meaning that they chose an option ARM because they could afford the minimum required payment. But remember, that minimum payment does not even cover the interest on the loan, so if that's all you can afford, you will have an escalating loan balance. Some people considered this a worthwhile risk to take when house prices were rising rapidly and it was easy to refinance into another loan before the higher payments kicked in.

So right off the bat, it's clear that the "option" part is much more troubling than the "ARM" part. And that becomes even more clear as the article profiles Harvey Clavon, who refinanced his home 3 years ago:

Mr. Clavon, 63, was planning to sell the home in a few years and retire to Palm Springs. So he got a loan called an option adjustable rate mortgage, or option ARM, which allowed him to pay less than the interest for the first five years.

On his annual salary of $100,000 as a television camera operator, he could afford the $2,200 initial mortgage payments. And he planned to sell the home before the mortgage reset.

. . .

Because Mr. Clavon made only minimum payments on his mortgage, his balance has risen to $680,000 from $618,000, on a house worth closer to $400,000.

“I don’t know what I’m going to do, ” he said. “I got duped into the loan, and I consider myself an educated man.”

There's a lot going on here, but let me focus on how Mr. Clavon ended up in such a difficult situation. We don't know why he was refinancing his house 3 years ago, but it's apparent that after the transaction he didn't have all that much equity in his house (or so we can assume based on how far underwater he is now). He then proceeded to make only the minimum payments for 3 years, racking up another $62,000 in debt. The housing bubble burst, and he now owes $680,000 on a house worth "closer to $400,00" (which doesn't narrow it down much). Assuming the house is worth $400,000, this means that if he sells it he will have to bring a check to closing to pay off the $280,000 that won't be covered by the purchase price.

Clavon claims to have been duped, but I can't think of a mortgage product that would have prevented this outcome. Clavon's problems are:

1. He didn't have enough money in 2006.

2. The housing bubble has burst and his house lost a lot of value.

3. He doesn't have enough money in 2009.

What kind of mortgage does he think would have solved any of these problems? If he didn't want to have such a large balance to pay off, why did he effectively keep borrowing money by not even paying the interest on his mortgage?

This last question is the key, I think. The truth is that Clavon couldn't afford whatever it is he needed to refinance for in the first place. Therefore he couldn't afford to pay off the debt he incurred in the refinancing, and therefore he only made minimum payments on his mortgage. A more responsible mortgage lender might not have written him an option ARM, but that means he probably couldn't have refinanced at all.

And that's probably what should have happened, but then it's not really the option ARM that has caused Clavon's problems.

Anyway, this doesn't change the fact that option ARMs are a problem in that many of them are toxic and will likely require more foreclosures. But if that's the point the article is trying to make, then I don't see why it spends so many paragraphs, right at the beginning, portraying Clavon as a victim of exotic financial products.

And I should note that I do sympathize with Clavon, who is in a terrible situation. The point here is to think about what can and what can't be blamed on option ARMs. Other than allowing him to live beyond his means, it's unclear what harm they have done to Clavon.

Monday, August 24, 2009


So my preferred way of buying CDs these days is from Lala. In my observation (small sample size), the CDs are cheaper than on Amazon (even taking shipping into account), and Lala throws in a free "online album" or whatever, meaning that once you've purchased the CD, you can also listen to it anytime on Lala for free.

Two advantages: you don't have to worry as much about the physical CD itself, and instant gratification. I ordered 2 CDs today, and listened to both of them repeatedly. I will probably be sick of them by the time they arrive.