Economics

I’m in the process of reading Akhil Reed Amar’s America’s Constitution: A Biography, and just came to the portion about the 16th Amendment, which instituted a federal income tax. I had already known that the tax was a very low percentage, but I hadn’t realized that only the top 1% of income earners paid any income tax. It would be a nice model to go back to, but not possible without dramatically reducing federal spending–the wealthiest Americans wouldn’t tolerate an extortionate percentage of taxation that would be required on the current level of spending, and given the huge amounts of money that are now a part of political campaigning, nobody gets elected without the support of at least some of the wealthiest Americans. (And those levels of spending are tied together–there’s huge money riding on political campaigns because there’s huge money and power in the hands of the federal government. The only way to reduce the former is to reduce the latter.) Here are the two paragraphs where Amar describes pre-Civil War and post-16th Amendment income taxes in the United States: Prior to the Civil War, at least seven states had adopted income taxes. High exemptions and graduated rates–the basic features of a progressive tax structure–were commonplace in these states. Congress followed this pattern when introducing a federal income tax in the 1860s. For instance, the 1865 federal tax code exempted all persons who made less than $600, taxed income between $600 and $5,000 at 5 percent, and subjected all income above $5,000 to a steeper 10 percent rate. Later federal laws tweaked the specifics but preserved the basic structure, under which more than three-quarters of federal revenue came from the seven wealthiest states: New York (which itself generated more than 30 percent of the total national intake), Massachusetts, Pennsylvania, Ohio, Illinois, New Jersey, and Connecticut. Under the law struck down in Pollock, incomes over $4,000 were taxed at 2 percent, all others were exempt. According to Treasury Department estimates, less than 1 percent of the population had been subject to this levy. … In the first income-tax statute enacted after the new amendment was in place, Congress once again opted for a progressive tax structure that exempted a large swath of low- and middle-income persons and taxed the rest at a sloping rate, beginning at 1 percent for an individual making $3,000 and topping out at 7 percent for income over $500,000. The $3,000 minimum threshold effectively limited the tax to the top 1 percent of the economic order. In 1916 the Supreme Court unanimously upheld the new tax law, expressly rejecting the notion that the “progressive feature” of the tax somehow rendered it unconstitutional. The American People had spoken and–this time, at least–the Court listened.

Despite new home builders offering unprecedented incentives, new home sales in Arizona are dismal. 2007 year-to-date sales (through July) were 33,510, compared to 41,835 for the same time period in 2006 and 68,235 for the same period in 2005. And this is while inventories and foreclosures are climbing. Historical Comments shrimplate (2007-08-10): One out of every three dollars generated by the Valley's economy comes from the housing industry. When that sinks, be in a lifeboat. It's gonna suck. ...

Arizona is the #7 state for per-capita preforeclosures: TOP 10 PREFORECLOSURE STATES State Filings Per CapitaNevada 19,044 2.55 percentFlorida 111,250 1.76 percentColorado 24,045 1.49 percentIllinois 52,984 1.35 percentNew Jersey 37,250 1.22 percentCalifornia 132,101 1.15 percentArizona 20,669 1.09 percentUtah 5,773 0.90 percentTexas 46,595 0.81 percentGeorgia 19,382 0.75 percent SOURCE: Foreclosures.com I’m not sure what the timeframe is for this data, but it looks like the last twelve months.

July, 2007, saw 2503 Notices of Trustee’s Sales in Maricopa County - yet another record. <img style=“display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;” src="/images/July07NTRs.jpg" border=“0” alt=““id=“BLOGGER_PHOTO_ID_5093562250792169458” /> Historical Comments houseofpain (2007-08-01): Holy moly, apocalypse!!! Anonymous (2007-08-01): I agree with house of pain. The pain is coming to the real estate market. I need more popcorn for this double feature. ...

The July 21, 2007 issue of The Economist has an article about a Swiss company that has opened a market for software vulnerabilities: Since economics, like nature, abhors a vacuum, a small industry of “security companies” has emerged to exploit the hackers’ dilemma. These outfits buy bugs from hackers (euphemistically known as “security researchers”). They then either sell them to software companies affected by the flaws, sometimes with a corrective “patch” as a sweetener, or use them for further “research”, such as looking for more significant—and therefore more lucrative—bugs on their own account. Such firms seek to act as third parties that are trusted by hacker and target alike; the idea is that they know the market and thus know the price it will bear. Often, though, neither side trusts them. Hackers complain that, if they go to such companies to try to ascertain what represents a fair price, the value of their information plummets because too many people now know about it. Software companies, meanwhile, reckon such middlemen are offered only uninteresting information. They suspect, perhaps cynically, that the good stuff is going straight to the black market.Last week, therefore, saw the launch of a service intended to make the whole process of selling bugs more transparent while giving greater rewards to hackers who do the right thing. The company behind it, a Swiss firm called WabiSabiLabi, differs from traditional security companies in that it does not buy or sell information in its own right. Instead, it provides a marketplace for such transactions. A bug-hunter can use this marketplace in one of three ways. He can offer his discovery in a straightforward auction, with the highest bidder getting exclusive rights. He can sell the bug at a fixed price to as many buyers as want it. Or he can try to sell the bug at a fixed price exclusively to one company, without going through an auction. ...

Outsourcing the Picket Line The picketers marching in a circle in front of a downtown Washington office building chanting about low wages do not seem fully focused on their message. … Although their placards identify the picketers as being with the Mid-Atlantic Regional Council of Carpenters, they are not union members. They’re hired feet, or, as the union calls them, temporary workers, paid $8 an hour to picket. Many were recruited from homeless shelters or transitional houses. Several have recently been released from prison. Others are between jobs. ...

In France, the penalties for speeding are now so widely seen as unfair that there is now a market for selling and purchasing the deduction of points from your license for traffic offenses. Each driver starts with 12 points on their license, and loses points for violations. Exceeding the speed limit by 20 kph or less has a two-point penalty, for example. Once you get to zero, your license is automatically suspended for six months. But if you get a traffic citation, you can pay 300-1500 euros per point to someone who is willing to take the rap for you (either because they don’t drive or are sufficiently far from zero that the penalty won’t bother them), and they’ll incur the points by sending in their information on your ticket. The French Interior Ministry is attempting to investigate means to crack down on this, but the volume of tickets is apparently making it difficult. More at the Reason blog. I think this mechanism could work well for photo radar speeding tickets in the U.S.

Peter Leeson, an economist at West Virginia University, is writing a three-part series on the economics of pirate behavior and institutions. The first two parts are available online. Part 1, “An-arrgh-chy: The Law and Economics of Pirate Organization," describes how pirates solved the problem of predation by captains that was common among naval and merchant ships by a system of checks and balances involving written constitutions and democratically elected captains and quarter-masters–in the 1670s, before England and a century before the United States introduced similar political developments. Part 2, “Pirational Choice: The Economics of Infamous Pirate Practices," looks at the reasons for the use of the “Jolly Roger” as a pirate flag and the practices of pirate torture and pirate conscription. Part 3 has been promised for the fall of 2007… These papers are an addition to the literature about non-governmental institutions of law and order that arise within criminal organizations, in the fringes between government jurisdictions, and in areas of governmental neglect. Some other works addressing these topics include Diego Gambetta’s excellent book The Sicilian Mafia: The Business of Private Protection, Robert Neuwirth’s book Shadow Cities: A Billion Squatters, A New Urban World, Ian Lambot and Greg Girard’s City of Darkness: Life in Kowloon Walled City, and the HBO series Deadwood and The Wire.

<img style=“display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;” src="/images/Jun07NTR.jpg" border=“0” alt=“Maricopa County’s Notices of Trustee’s Sales, 1993 - 2007"id=“BLOGGER_PHOTO_ID_5083422755374284578” /> June’s Notices of Trustee’s Sales for the Phoenix metro area topped out at 2330, continuing the trend line set a year or so ago. At this point I can’t help thinking we’ve got nowhere to go but up. Even the scammers are saying that Phoenix is a bad market.

The Arizona Regional Multiple Listing Service just released their ARMLS Economic and Market Watch Report for the first quarter of 2007. The report says that the current market in Maricopa County (MC) for residential real estate is neither a buyer’s nor a seller’s market - it’s right in the middle. As I have argued elsewhere, to call the current Phoenix market anything other than a seller’s market is absurd. If you buy right now you lose, in my humble opinion. In spite of the fact that MC housing inventory grew from 43,164 homes (at the end of Q4 ‘06) to 52,055 on March 31st, and that the number of homes sold fell by 910, the report has the audacity to claim that “[c]ombined with historically low mortgage rates, home sales should continue at a steady pace”, and that Q2’s average sales price will be higher than Q1’s $350,400 (I’m not a big fan of using the average price as a gauge of anything. Its value is too easily influenced by outliers on the high end). In the section on “Trends”, Ken Fears says the following: …there were 26,135 sub-prime loans issued in 2005 [sic - I think that should be 2004] for the Phoenix-Mesa-Scottsdale metro area, which represent 15.4% of the total population of loans for this area. In 2005, the percentage of sub-prime loans in the Phoenix-Mesa-Scottsdale area rose to 31.5% for a total of 69,997 sub-prime loans issued. This figure was higher than the nation as a whole where 28% of loans in 2005 were sub-prime compared to 14% in 2004. So what does this mean for local Realtors®? There is no doubt that the rules for making sub-prime loans have been to [sic] lax. Furthermore, defaults will rise as mortgage rates rise and employment begins to falter with the waning economy. However, banks learned an important lesson in the last two mortgage banking crisis [sic]. It is much better to help the holders of sub-prime loans to meet their monthly payment than it is for the bank to write off the loan as a loss; a small bite to profits is better than a total loss. So banks will be much more inclined to re-work loan agreements. In addition, sub-prime loans make up a small percentage of the total number and dollar volume of existing mortgages. These factors help to mitigate the notion that there is a large overhang of defaults about to splash on the market, bringing down home prices and sales and the overall economy with it. David Lereah’s “Commentary” had this to say: On balance, I expect about 10 to 25 percent of subprime households to be unable to secure a mortgage loan because of today’s stricter lending standards. However, many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so (e.g., saving for a down payment, growing their income). So the long-term health of the housing market will probably stay in tact. In the near-term, I would expect home sales to fall by 100,000 to 250,000 annually during the next two years due to tighter underwriting practices, slowing the nation’s housing recovery. As for the over 8 million adjustable-rate loans (25 percent of which were sub-prime) originated during the past three years, First American Corelogic estimates that about 1.1 million of them totaling about $326 billion are likely to end up in fore-closure. A bit over $300 billion of subprime adjustable mortgage loans are due to re-set by October 1st of this year. Most lenders will attempt to work out problem loans by refinancing borrowers into other mortgages. A disproportionate share of these foreclosures will occur in high cost regions, like California. Certainly, a rise in foreclosures results in an upward blip in housing inventories, depressing home values. But the good news is that these foreclosures will occur in relatively healthy local markets that boast decent levels of economic activity and job creation, improving the prospects of selling the foreclosed properties in a reasonable amount of time. Foreclosures will create temporary inventory problems, but inventories will be eventually worked out.“Inventories will eventually be worked out,” which will be “depressing home values” - but, nonetheless, Q2 in MC will see a “steady pace” in home sales and a higher average sale price? Hmmmmm… Dr. Lawrence Yun, in his “Forecast” section, says that in the last year Phoenix jobs grew by 89,000 and that this may increase the number of potential homebuyers. Yun acknowledges that Phoenix has seen a fall in home sales, but he says that rental rates have, as a result, been “climbing fast.” He asserts that, “very soon, the squeezed renters will begin to search for a home purchase." Rents in the area are definitely rising, as you would expect, but they’ll have to rise a long way to catch up with area home prices! Forecasting the impact of the subprime fallout, Yun presents this analysis: Consider, the subprime loans comprised about 13% of the overall mortgage market, and 20% of mortgage originations since 2005(though there are divergent figures depending upon the source). The recent overall rise in default rates is primarily associated with the subprime loans rather than with the predominant prime loans. The delinquency rate on prime loans was only 2.8% by comparison with the foreclosure rate running at 0.5%. Both delinquencies and foreclosures for prime loans have been steady with very little movement. Therefore, a 14.3% delinquency on 13% of the loan market means subprime problems are impacting close to 2% of all loans. Factor in the fact that one-third of all homeowners own their home free-and-clear, the subprime problems are associated with about 1.4% of all homes. History says that less than half of these homes with delinquent mortgage payments ever move into actual foreclosure. So roughly speaking, 0.7% of all homes will at most run into eventual foreclosure from recent meltdown in the subprime sector. Something tells me that Yun’s numbers are overly rosy. Using his 1.4% figure only gives us an average of 1459 Trustee’s Sale Notices per month in Maricopa County. Since we’re already seeing numbers higher than that, and there’s no indication that things are going to be slowing down, Yun appears to be missing a piece of the puzzle. To be fair, Yun’s numbers refer strictly to subprime loans - so one could argue that the additional numbers seen in the real world are delinquencies in alt-A and prime mortgages. In any case, the next few months should prove very interesting.